Instructions: Answer all questions below. You must show and label all calculatio
ID: 2497598 • Letter: I
Question
Instructions: Answer all questions below. You must show and label all calculations. Part 1. On January 1, 2007, Hanson Corporation sold $5,000,000 of its 8%, 10-year bonds for $4,707,500. Interest is paid semiannually on January 1 and July 1. On January 1, 2012, Hanson purchased 1/2 of the bonds on the open market at 99 and retired them. Hanson uses the straight-line method for amortization of bond premiums and discounts. What was the amount of the gain or loss on retirement of the bonds? Prepare the journal entry needed at January 1, 2012 to record retirement of the bonds. Assume that interest and premium or discount amortization have already been recorded through this date. Prepare the journal entry needed at July 1, 2012 to record interest and premium or discount amortization. Part 2. On January 1 of the current year, Feller Corporation issued $2,500,000 of 10% bonds on a basis to yield 9%, receiving $2,612,150. Interest is payable annually on December 31 and the bonds mature in 6 years. The effective-interest method is used. What is the interest expense for the first year? What is the interest expense for the second year? Part 3. Everhart Company issues $10,000,000, 6%, 5-year bonds dated January 1, 2010 on January 1, 2010. The bonds pays interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?
Explanation / Answer
Solution:
Part1:
Face Value of the bonds $5,000,000
Coupon rate 8%
Life of the bonds 10year
Issue price $4,707,500
Discount $292,500
Amortization per yr by straight line method = $292,500/10years = $29,250
On date of issue the entry would be:
Cash A/c $4,707,500
Discount on bonds payale a/c $292,500
Bonds payable A/c $5,000,000
Interst payment:
On Jan1 Interest expense A/c $200,000
Interest payable a/c $185,375
Discount on bonds payable a/c $14,625
Hence on the date of retirement of bonds the carrying value of bonds can be calculated as under:
Every year Discount on bonds will be amortized with an amount =$29,250
On 2012 the discount on bonds will be = $146,250 - ($29,250*5) = 0
Hence carrying value of the bonds as on Jan1,2012 = $5,000,000
1/2 of the bond value = $5,000,000/2 = 2,500,000
Amount paid for retirement of bonds = 25,000 bonds * $99 = $2,475,000
Bonds payable A/c $2,500,000
Cash A/c $2,475,000
Profit on Bond retirement A/c $25,000
July1 Interest expense A/c $100,000
Interest payable A/c $85,375
Discount on bonds payable A/c $14,625
Part2:
Journal entry on the date of issue of Bonds:
Jan1 Cash A/c $2,612,150
Bonds Payable A/c $2,500,000
Premium on issue A/c $112,150
Interet expense for the first year:
Amortization of premium by straight line method = $112,150/6years = $18,692
Interest expense = ($2,500,000*10%) - $18,692 = $231,308
Interest expense for second year = ($2,500,000*10%) - $18,692 = $231,308
Part3:
Since the yield to maturity 5% is lower than the coupon rate of 6% the bonds are said to be issued at a premium.
Face value of the bond = $10,000,000
Coupon rate = 6%
Life of Bonds = 5 years
Yield = 5%
Proceeds from issue of Bonds = $10,000,000*105/100 = $10,500,000