Straight line method 010105 1041583 063005 40000 35842 4158 1037425 123105

Straight line method 010105 1041583 063005 40000

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Straight-line method: 01/01/05 $1,041,583 06/30/05 $40,000 $35,842 $4,158 1,037,425 12/31/05 40,000 35,842 4,158 1,033,266 *Rounded. Cash to pay bonds on redemption: $1,000,000 × 102% $1,020,000 Carrying value at redemption date 1,033,266 Gain on redemption $ 13,266 Effective interest method: 01/01/05 $1,041,583 06/30/05 $40,000 $36,455 $3,545 1,038,038 12/31/05 40,000 36,331 3,669 1,034,370 *Rounded. Cash to pay bonds on redemption: $1,000,000 × 102% $1,020,000 Carrying value at redemption date 1,034,370 Gain on redemption $ 14,370 2 Prepare the journal entries necessary to record the bond redemption on December 31, 2005 for both the straight-line and effective interest methods. Straight-line method: DESCRIPTION DEBIT CREDIT Bonds Payable 1,000,000 Date Cash Interest Expense Premium Amortization Bond Carrying Value Date Cash Interest Expense Premium Amortization Bond Carrying Value * *
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Premium on Bonds 33,266 Gain on Bond Redemption 13,266 Cash 1,020,000 Effective interest method: DESCRIPTION DEBIT CREDIT Bonds Payable 1,000,000 Premium on Bonds 34,370 Gain on Bond Redemption 14,370 Cash 1,020,000 3 Assume instead that the company redeems the bonds at 105. Determine the amount of gain or loss on bond redemption for both the straight-line and effective interest methods. Straight-line method: Cash to pay bonds on redemption: $1,000,000 × 105% $1,050,000 Carrying value at redemption date 1,033,266 Loss on redemption ($ 16,734) Effective interest method: Cash to pay bonds on redemption: $1,000,000 × 105% $1,050,000 Carrying value at redemption date 1,034,370 Loss on redemption ($ 15,630) 4 Assume that instead of redeeming all of the bonds on December 31, 2005, the company decides to redeem bonds with a face value of $400,000 at 102 on that date. Determine the amount of gain or loss on bond redemption and prepare the journal entries necessary to record the redemption on December 31, 2005 for both the staright-line and effective interest methods. Straight-line method: Cash to pay bonds on redemption: $400,000 × 102% $ 408,000 Carrying value at redemption date ($1,033,266 × 40%) 413,306 Gain on redemption $ 5,306 DESCRIPTION DEBIT CREDIT Bonds Payable 400,000 Premium on Bonds 13,306 Gain on Bond Redemption 5,306 Cash 408,000
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Effective interest method: Cash to pay bonds on redemption: $400,000 × 102% $408,000 Carrying value at redemption date ($1,034,370 × 40%) 413,748 Gain on redemption $ 5,748 Effective interest method: DESCRIPTION DEBIT CREDIT Bonds Payable 400,000 Premium on Bonds 13,748 Gain on Bond Redemption 5,748 Cash 408,000
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Exercise 13-8 Gain or Loss - Redemption Not on an Interest Date Assume that on January 1, 2005, a company issues bonds. The bonds are dated January 1, 2005, and have a face amount of $800,000. Interest will be paid at the rate of 8 percent semiannually for five years. The bonds are issued at 98. The company uses the straight-line method of amortization and amortizes the premium or discount on each interest date. Assume that the company redeems the bonds on April 1, 2006, for 102 plus accrued interest. Required: 1 Determine the amount of gain or loss on bond redemption (You may ignore income taxes). 01/01/05 $784,000 06/30/05 $32,000 $30,400 $1,600 785,600 12/31/05 32,000 30,400 1,600 787,200 06/30/06 32,000 30,400 1,600 788,800 800,000 (FV of bonds) - 784,000 (carrying value) = $16,000 discount $16,000/5 years = $3,200 discount amortized per year/ 2 periods = $1,600 amortized each period.
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  • Fall '09
  • CHERIEABAKER
  • 1966, 1973, 1970, 1965

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