Question

Sandhill Company issued its 7%, 25-year mortgage bonds in the principal amount of $3,230,000 on January 2, 2006, at a discount of $135,000, 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 11%, 20-year debenture bonds in the principal amount of $4,180,000 at 103, 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 11% bonds and (2) the redemption of the 7% bonds. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

No. Date Account Titles and Explanation Debit Credit

(1)

December 18, 2020

(2)

January 2, 2021

(b) Indicate the income statement treatment of the gain or loss from redemption.

The  loss gain  is reported as  Extraordinary Loss Extraordinary Gain Ordinary Loss Ordinary Gain

.

Answer 1

(a) Prepare journal entries to record the issuance of (1) the 11% bonds and (2) the redemption of the 7% bonds.

December 18, 2020	Cash	4305400
	11%bond payable(face value)(4180000/100)*103		4180000
	Premium on issue of bond payable(balance)		125400
January 2, 2021	7% bond payable(face value)	3230000
	Loss on redemption of bond(balance)	215500
	Discount on bond payable(135000/25)*10		54000
	Cash(3230000*105%)		3391500

(b) Indicate the income statement treatment of the gain or loss from redemption.

The loss on redemption of $ 215500 will be transferred to income statement.