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Exercise 10-9 Straight-Line: Bond computations, amortization, and bond retirement LO P2, P4 [The following information applies...

Exercise 10-9 Straight-Line: Bond computations, amortization, and bond retirement LO P2, P4

[The following information applies to the questions displayed below.]

On January 1, 2017, Shay issues $390,000 of 8%, 20-year bonds at a price of 97.00. Six years later, on January 1, 2023, Shay retires 20% of these bonds by buying them on the open market at 104.50. All interest is accounted for and paid through December 31, 2022, the day before the purchase. The straight-line method is used to amortize any bond discount.

Exercise 10-9 Part 7

7. Prepare the journal entry to record the bond retirement at January 1, 2023.
  

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Answer #1

Issue price of bonds = $390,000 * 97% = $378,300

Discount on issue of bonds = $390,000 - $378,300 = $11,700

Annual amortisation of discount = $11,700/20 years = $585

Discount amortised upto December 31, 2022 = $585 * 6 years = $3,510

Book value of bonds as on January 1, 2023 = Issue price + Discount already amortised = $378,300 + $3,510 = $381,810

Book value of bonds retired = $381,810 * 20% = $76,362

Cash paid for retirement of bonds = $390,000 * 20% * 104.50% = $81,510

Loss on retirement of bonds = Cash paid for retirement - Book value = $81,510 - $76,362 = $5,148

Discount unamortised = ($11,700 - $3,510) * 20% = $1,638

Journal entry shall be as below:

Date

General Journal

Debit

Credit

Jan 01, 2023

Bonds payable

78,000

Loss on retirement of bonds payable

5,148

Discount on bonds payable

1,638

Cash

81,510
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