Question

To take advantage of lower interest rates and to finance the redemption of 6% Bonds, on Sept.1st 2016, ABC issued 5% Bonds in the face value of $100,000 to yield 6%. The maturity period of these 5% Bonds is 10 years and interest is paid semiannually on 1st Jan and 30th June.The proceeds from the issue of 5% Bonds are used to redeem 6% Bonds Payable @ 101 on Sept.1st 2016. Please assist with creating the proper journal entries for this interaction. Please show all detailed calculations. The journals should appear as:

1) Bonds Payable (6%)

Loss on Redemption of Bonds

Cash

Discount on Bonds Payable

2) Cash

Discount on Bonds Payable

Bonds Payable

3) Interest Expense

Cash

Answer 1

	PV of interest payamnet+PV of principal payment
	Price of Bond	2500*(1-(1.03)^-20)/.03)+100000/(1.03)^20
	discount factor taken upto 5 decimal	(2500*(1-.55368)/.03)+100000*.55368	92561
	Interest payment (100000*2.5%)	2500
	n	20
	i=6*1/2	3%
	Discount
	100000-92561	7439
		Dr	Cr
1)	Cash	92561
	Discount on bonds payable	$7,439
	Bonds payable		$100,000
	Bonds payable	$100,000
	Loss on Redemption of Bonds (bal fig)	$8,439
	Discount on bonds payable		$7,439
	Cash		101000
As per the information the above entry can be made. if any doubt please comment