2008-05-27_114353_Bonds - Prepare the necessary journal entries to record the following transactions relating to the long-term issuance of bonds of

2008-05-27_114353_Bonds - Prepare the necessary journal...

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Prepare the necessary journal entries to record the following transactions relating tothe long-term issuance of bonds of Sloan Co.: March 1: Issues $600,000 face value Sloan Co. second mortgage, 8% bonds for $654,120, including accrued interest. Interest is payable semiannually on December 1 and June 1 with the bonds maturing 10 years from this past December 1. The bonds are callable at 102. June 1: Paid semiannual interest on Sloan Co. bonds. (Use straight-line amortization of any premium or discount.) bonds are issued after 3 months, the life of the bonds is 117 months. The amortization is for 3 months from March 1 to June 1. Cash to be paid is 600,000 × (8%/2) = 24,000 Dec. 1: Interest Expense Dr ...........................21,840 Premium on Bonds Payable ($42,120 × (6 ÷117) Dr...................2,160 Cash Cr .................................................24,000 The above is the entry for interest payment. For bond redemption we have Bonds Payable Dr............................300,000
Premium on Bonds Payable* Dr..........19,440 Gain on Redemption of Bonds Cr……........13,440 Cash Cr ........................................................306,000 Bonds payable is debited for $400,000 the face value of bonds repurchased. The cash paid is 102 as per the call provision. The amount is 300,000 × 1.02=306,000 The premium on bonds payable now is 42,120 – (1,080 + 2,160). This is the total premium for $600,000 of bonds. Since 1/2 of these bonds are repurchased, we need the premium for 1/2 of it. Premium for 400,000 worth of bonds is *1/2 × [$42,120 – (1,080 + 3,700)] = 19,440The carrying value of the bonds is 319,440 and the repurchase is 306,000. The differenceis the gain on redemption.

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