Question

On June 30, 2012, Windsor Company issued 12% bonds with a par value of $750,000 due...

On June 30, 2012, Windsor 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, 2020. 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, 2021, and to issue new bonds. New 8% bonds were sold in the amount of $1,020,000 at 101; they mature in 20 years. Windsor 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, 2021.

(b) Prepare the entry required on December 31, 2021, to record the payment of the first 6 months’ interest and the amortization of premium on the bonds.

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Answer #1

a) Journal entry

Date General Journal Debit Credit
June 30,2021 Bonds payable 750000
Loss on bonds payable 38250
Discount on bonds payable (15000/20*11) 8250
Cash (750000*1.04) 780000
June 30,2021 Cash (1020000*1.01) 1030200
Bonds payable 1020000
Premium on bonds payable 10200

Journal entry

Date General Journal Debit Credit
Dec 31,2021 Interest expense 40545
Premium on bonds payable (10200/20)*6/12 255
Cash (1020000*8%*6/12) 40800
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