Question

Problem 14-04 Monty Company issued its 7%, 25-year mortgage bonds in the principal amount of $3,270,000 on January 2, 2006, at a discount of $154,000, which it proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 105% of the principal amount, but it did not provide for any sinking fund. On December 18, 2020, the company issued its 12%, 20-year debenture bonds in the principal amount of $3,620,000 at 102, and the proceeds were used to redeem the 7%, 25-year mortgage bonds on January 2, 2021. The indenture securing the new issue did not provide for any sinking fund or for redemption before maturity. (a) Prepare journal entries to record the issuance of (1) the 12% bonds and (2) the redemption of the 7% bonds. (If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Debit Credit No. Date Account Titles and Explanation (1) December 18, 2020 Cash 3692400 Premium on Bonds Pay 72400 Bonds Payable 3620000 (2) January 2, 2021 Bonds Payable Loss on Redemption of Boi Discount on Bonds Payable Cash (b) Indicate the income statement treatment of the gain or loss from redemption. The loss is reported as Extraordinary Loss Click if you would like to Show Work for this question: Open Show Work

Answer 1

Answer:

a.)

Date	Account	Debit	Credit
18/12/2017	Cash (3620000 x 102%)	$3692400
	Bonds Payable		$3620000
	Premium on Bonds Payable		$72400
	(To record issuance of bonds.)
02/01/2018	Bonds Payable	$3270000
	Loss on Redemption of Bonds	$225100
	Cash (3270000 x 105%)		$3433500
	Discount on Bonds Payable (154000 x 10/25)		$61600
	(To record retirement of bonds.)

b)
The above loss is suppose to be shown as loss from ordinary activity