The Dec. 31, 2001, balance sheet includes the following items:
9% bonds payable due 12/31/2010 $800,000
Discount on bonds payable $21,600
The bonds were issued on December 31, 2000, at 97, with interest payable on June 30 and December 31 of each year. The straight-line method is used for discount amortization.
On March 1, 2002, they retired $400,000 of these bonds at 98 plus accrued interest. Prepare the journal entries to record retirement of the bons, including accrual of interest since the last payment and amortization of the discount.
To record the retirement of bonds on March 1, 2002, including the accrual of interest since the last payment and the amortization of the discount, the following journal entries need to be made:
1. Accrual of interest expense:
Date: March 1, 2002
Account Debit: Interest Expense $10,000 [($800,000 * 9%)/2]
Account Credit: Interest Payable $10,000
Explanation: This entry records the accrual of interest expense from the last payment date (December 31, 2001) to the retirement date (March 1, 2002).
2. Retirement of bonds payable:
Date: March 1, 2002
Account Debit: Bonds Payable $400,000
Account Debit: Discount on Bonds Payable $14,560 [($21,600 * $400,000)/$800,000]
Account Credit: Cash $394,560 [($400,000 * 98%) + $10,000]
Explanation: This entry records the retirement of $400,000 worth of bonds, including the amortization of the discount on the bonds payable. The cash amount is calculated as the face value of the bonds ($400,000) multiplied by the retirement price (98%), plus the accrued interest ($10,000).
3. Amortization of the discount on bonds payable:
Date: March 1, 2002
Account Debit: Amortization of Discount on Bonds Payable $7,280 [($21,600 / 10 years) * 2 years]
Account Credit: Discount on Bonds Payable $7,280
Explanation: This entry records the amortization of the discount on the bonds payable for the period from January 1, 2002, to the retirement date (March 1, 2022).
Please note that you should consult with a professional accountant or financial advisor to confirm the accuracy and application of these journal entries to your specific situation.
To prepare the journal entries for the retirement of the bonds and the related transactions, we need to follow a few steps.
Step 1: Calculate the accrued interest since the last payment date (December 31, 2001) to the retirement date (March 1, 2002).
To calculate the accrued interest, we need to determine the number of days between December 31, 2001, and March 1, 2002. Let's use a 365-day year for simplicity.
Number of days = 31 (January) + 28 (February) + 1 (March) = 60 days
Next, calculate the daily interest expense:
Daily interest expense = (Bonds payable amount * Interest rate) / 365 days
Interest rate = 9%
Bonds payable amount = $800,000
Daily interest expense = ($800,000 * 9%) / 365 days = $197.26 (rounded to the nearest cent)
Accrued interest = Daily interest expense * Number of days
Accrued interest = $197.26 * 60 days = $11,835.60 (rounded to the nearest cent)
Step 2: Calculate the gain or loss on the retirement of the bonds.
The gain or loss on the retirement is determined by comparing the cash paid to retire the bonds with the carrying value (book value) of the bonds at the retirement date.
Cash paid to retire the bonds = $400,000 * 98% = $392,000
Carrying value = Bonds payable amount - Discount on bonds payable
Carrying value = $800,000 - $21,600 = $778,400
Gain or loss on the retirement = Cash paid - Carrying value
Gain or loss on the retirement = $392,000 - $778,400 = -$386,400 (there is a loss, as the cash paid is less than the carrying value)
Now, with the necessary calculations completed, we can proceed to prepare the journal entries.
Journal Entry 1: Accrual of interest on March 1, 2002:
Date: March 1, 2002
Account Debit Credit
Interest Expense $11,835.60
Discount on bonds payable $4,052.24
Bonds Payable $7,783.36
Cash $11,835.60
(To record the accrued interest and discount amortization)
Explanation: We debit Interest Expense for the accrued interest and Discount on bonds payable for the amortization of the discount. We credit Bonds Payable to reduce the liability and Cash to reflect the payment.
Journal Entry 2: Retirement of bonds on March 1, 2002:
Date: March 1, 2002
Account Debit Credit
Bonds Payable $400,000
Loss on Retirement of Bonds $386,400
Discount on bonds payable $13,600
Cash $392,000
(To record the retirement of bonds at a loss)
Explanation: We debit Bonds Payable to eliminate the liability, Loss on Retirement of Bonds to account for the loss incurred, and Discount on bonds payable for the remaining unamortized discount. We credit Cash for the amount paid to retire the bonds.
These journal entries capture the retirement of the bonds, including the accrual of interest and the amortization of the discount.