Question

On June 30, 2009, Sage Company issued 12% bonds with a par value of $750,000 due in 20 years. They were issued at 98 and were callable at 104 at any date after June 30, 2017. Because of lower interest rates and a significant change in the company’s credit rating, it was decided to call the entire issue on June 30, 2018, and to issue new bonds. New 8% bonds were sold in the amount of $1,020,000 at 101; they mature in 20 years. Sage Company uses straight-line amortization. Interest payment dates are December 31 and June 30.

(a) Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2018.

(b) Prepare the entry required on December 31, 2018, to record the payment of the first 6 months’ interest and the amortization of premium on the bonds.

Answer 1

(a) Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2018.

the discount on bonds payable = $750,000 x 2% = $15,000

amortization per coupon = $15,000 / 40 coupons = $375

By June 30, 2018, $375 x 18 = $6,750 of the discount were already amortized. The carrying value of the bonds = $750,000 - ($15,000 - $6,750) = $741,750

loss on redemption of the bonds = redemption value - carrying value = $780,000 - $741,750 = $38,250

Journal entry to record redemption of bonds:

June 30, 2018, bonds redeemed at a loss

Dr Bonds payable 750,000

Dr Loss on redemption of bonds 38,250

Cr Cash 780,000

Cr Discount on bonds payable 8,250

Journal entry to record new issuance of bonds:

June 30, 2018, bonds issued at a premium

Dr Cash 1,030,200

Cr Bonds payable 1,020,000

Cr Premium on bonds payable 10,200

(b) Prepare the entry required on December 31, 2018, to record the payment of the first 6 months’ interest and the amortization of premium on the bonds.

amortization of premium per coupon = $10,200 / 40 = $255

December 31, 2018

Dr Interest expense 40,545

Dr Premium on bonds payable 255

Cr Cash 40,800