Question

BOND PROBLEM 1 Cardinal Company 6/30/y1, $2,000,000 face value bonds, with an 11% coupon rate, are issued to yield 10%. These are 20- year bonds, and they pay interest on June 30 and January 1. These bonds were issued for $2,171,600. On May 1, y2, $1,300,000 face value bonds are redeemed at 96. This company has a December 31 year end. Please record: 6/30/y1 issuance of the bonds. 12/31/y1 accrual of interest. 1/1/y2 payment of interest 5/1/y2 payment of interest for the bonds being redeemed as well as the redemption of the bonds.

Answer 1

Journal Entry:
Date	accounts and explanation	Debit $	Credit $
6/30/y1	Cash	2171600
	Bonds Payable		2000000
	Premium on Bonds Payable		171600
	(bonds issued on premium)
12/31/y1	Interest expense	108580
	Premium on Bonds Payable	1420		(110000 - 2171600*5%)
	Interest payable		110000	2000000*5.5%
	(interest made due)
1/1/y2	Interest payable	110000
	Cash		110000
	(interest paid)
5/1/y2	Interest expense	47021		47667 - 646
	Bonds Payable	1300000
	Premium on Bonds Payable	109971		(171600*13/20) - 1569
	Cash		1295667	1300000*0.96 + 47667
	Gain on redemption		161325
	( redemption of 1300000 bonds and gain recorded)
AMORTISATION SCHEDULE FOR 1300000 REDEMPTION:
Period	cash interest	interest exp.	Prem. Amortised	Carrying value
6/30/y1				1411540
1/1/y2	71500	70577	923	1410617
5/1/y2	47667	47021	646	1409971
	119167	117598	1569