Question

The following information is taken from Martinez Corp.’s balance sheet at December 31, 2016.

Current liabilities
Interest payable				$ 90,000
Long-term liabilities
Bonds payable (7%, due January 1, 2027)		$3,600,000
Less: Discount on bonds payable		36,000		3,564,000

Interest is payable annually on January 1. The bonds are callable on any annual interest date. Martinez uses straight-line amortization for any bond premium or discount. From December 31, 2016, the bonds will be outstanding for an additional 10 years (120 months).

(a)		Journalize the payment of bond interest on January 1, 2017.
(b)		Prepare the entry to amortize bond discount and to accrue the interest on December 31, 2017.
(c)		Assume on January 1, 2018, after paying interest, that Martinez Corp. calls bonds having a face value of $600,000. The call price is 102. Record the redemption of the bonds.
(d)		Prepare the adjusting entry at December 31, 2018, to amortize bond discount and to accrue interest on the remaining bonds.

(Credit account titles are automatically indented when amount is entered. Do not indent manually.)

No.	Date	Account Titles and Explanation	Debit	Credit
(a)	Jan. 1 2017	enter an account title to record transaction A on January 1, 2017	enter a debit amount	enter a credit amount
		enter an account title to record transaction A on January 1, 2017	enter a debit amount	enter a credit amount
(b)	Dec. 31 2017	enter an account title to record transaction B on December 31, 2017	enter a debit amount	enter a credit amount
		enter an account title to record transaction B on December 31, 2017	enter a debit amount	enter a credit amount
		enter an account title to record transaction B on December 31, 2017	enter a debit amount	enter a credit amount
(c)	Jan. 1 2018	enter an account title to record transaction C on January 1, 2018	enter a debit amount	enter a credit amount
		enter an account title to record transaction C on January 1, 2018	enter a debit amount	enter a credit amount
		enter an account title to record transaction C on January 1, 2018	enter a debit amount	enter a credit amount
		enter an account title to record transaction C on January 1, 2018	enter a debit amount	enter a credit amount
(d)	Dec. 31 2018	enter an account title to record transaction D on December 31, 2018	enter a debit amount	enter a credit amount
		enter an account title to record transaction D on December 31, 2018	enter a debit amount	enter a credit amount
		enter an account title to record transaction D on December 31, 2018

Answer 1

Credit Debit $ 90,000 $ 90,000 $255,600 $ 3,600 $ 252,000 No. Date Account Titles and Explanation (a) Jan.1, 2017 Interest Payable Cash (6) Dec.31,2017 Interest Expense Discount on Bonds payable Interest payable (c) Jan.1, 2018 Bonds Payable Loss on Bond Redemption Discount on Bonds payable Cash (d) Dec.31,2018 Interest Expense Discount on Bonds payable Interest Payable $600,000 $ 17,400 $ 5,400 $612,000 $213,000 $ 3,000 $210,000 Working Notes: Dec.31,2017 Interest Payable = $3,600,000*7% = $252,000 Discount on Bonds payable = $36,000/10 = $3,600 Interest Expense = $252,000+$3,600 = $255,600 Jan.1,2018 Cash = $600,000*102/100 = $612,000 Discount OnBonds payable = ($36,000-$3,600)*$600,000/$3,600,000 = $5,400 Loss on Bond Redemption = $612,000+$5,400-$600,000 = $17,400 Dec.31,2018 Interest Pyable = ($3,600,000-$600,000)*7% = $210,000 Discount on Bonds payable = ($36,000-$3,600-$5,400)/9 = $3,000 Interest Rexpense = $210,000+$3,000 = $213,000