14-12 - be recognized by Prebish as a result of retiring...

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Question:L (Entry for Retirement of Bond; Bond Issue Costs) On January 2, 2005, Prebish Corporation issued $1,500,000 of 10% bonds at 97 due December 31, 2014. Legal and other costs of $24,000 were incurred in connection with the issue. Interest on the bonds is payable annually each December 31. The $24,000 issue costs are being deferred and amortized on a straight-line basis over the 10-year term of the bonds. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable “interest method”.) The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2010, Prebish called $1,000,000 face amount of the bonds and retired them. Ignoring income taxes, compute the amount of loss, if any, to
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Unformatted text preview: be recognized by Prebish as a result of retiring the $1,000,000 of bonds in 2010 and prepare the journal entry to record the retirement. Solution: Prepare the journal entry to record the retirement: January 2, 2010 Particular Debit Credit Bonds Payable Dr $1,000,000 Loss on Bond Retirement Dr $ 25,000 Discount on a Bonds Payable Cr 15,000 Cash Cr 1,010,000 (Being the bond payable at premium of 1% and discount of the remaining period is adjusted while the remaining part is the loss on Bond Retirement) Discount on bond premium 1,500,000 *.03 = 45,000 Discount write off yet = $45000 * 0.5 = $22,500 Remaining discount to be consider while retirement of bond which is 22500*2/3 = $ 15,000 So, the total loss is $10,000 + $15000= $ 25,000...
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14-12 - be recognized by Prebish as a result of retiring...

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