Question

P14-7B (L03,4,5) (Entries for Life Cycle of Bonds) On June 1, 2017, Royal Palm Company sold 6,000 of its 6%, 20-year, $1,000 face value bonds at 96. Interest payment dates are December 1 and June 1, and the company uses the straight-line method of bond discount amortization. On February 1, 2018, Royal Palm took advantage of favorable prices of its stock to extinguish 4,000 of the bonds by issuing 500,000 shares of its $1 par value common stock. At this time, the accrued interest was paid in cash. The company’s stock was selling for $8.50 per share on February 1, 2018.

Instructions

Prepare the journal entries needed on the books of Royal Palm Company to record the following.

(a) June 1, 2017: issuance of the bonds.

(b) December 1, 2017: payment of semiannual interest.

(c) December 31, 2017: accrual of interest expense.

(d) February 1, 2018: extinguishment of 4,000 bonds. (No reversing entries made.)

Answer 1

DATE	EXPLANATION	DEBIT	CREDIT
1-Jun	CASH	576000
	DISCOUNT ON BONDS PAYABLE	24000
	BONDS PAYABLE		600000
1-Dec	INTEREST EXPENSE	18600
	CASH		18000
	DISCOUNT ON BONDS PAYABLE		600
31-Dec	INTEREST EXPENSE	3000
	ACCRUED INTEREST EXPENSE		3000
1-Feb	BONDS PAYABLE	400000			(600000*4000)/6000
	INTEREST EXPENSE	1000			(400000*3%)/12
	ACCRUED INTEREST EXPENSE	2000			(3000/6000)*4000
	GAIN ON EXTINGUISHMENT OF BONDS		3865600		500000+3750000+15600-400000
	COMMON STOCK		500000		500000*1
	ADDITIONAL PAID IN CAPITAL-EQUITY		3750000		500000*7.5
	DISCOUNT ON BONDS PAYABLE		15600		(23400/6000)*4000
	CASH		3000		1000+2000