Bonds Payable Issued Between Interest Dates - Early Retirement

Question

Examlex · Accepted Answer

The Answer is (a)

\begin{array}{|l|l|r|r|}\hline 1 \text { Feb } & \text { Cash } & 4,530,000 & \\hline & \text { Bond Payable } & & 4,500,000 \\hline & \text { Bond Interest Payable } & & 30,000 \\hline & \begin{array}{l}\text { Issued } \$ 4,500,000 \text { face value bonds at par, } \\text { plus } 1 \text { month's accrued interest } \(\$ 4,500,000 \times 8 \% \times 1 / 12)\end{array} & &30,000 \\hline\end{array}

(b)

\begin{array}{|l|l|r|r|}\hline \text { 30 June } & \text { Bond Interest Payable } & 30,000 & \\hline & \text { Bond Interest Expense } & 150,000 & \\hline & \text { Cash } & & 180,000 \\hline& \begin{array}{l}\text { To record payment of semiannual interest } \(\$ 4,500,000 \times 8 \% \times 6 / 12)\end{array} & & \\hline\end{array}

(c) $330,000 interest expense
Since the bonds were issued at par, interest expense is equal to the contractual interest for the period that the bonds were outstanding.
($4,500,000

\times

.08

\times

11/12 = $330,000)
(d) $-0- accrued bond interest payable
The interest payment date is 31 December; therefore, interest for the last six months of a year is paid and does not appear as a liability in the statement of financial position at 31 December.
(e)

\begin{array}{|l|l|r|l|}\hline \text { Year 3 } & & & \\hline 1 \text { July } & \text { Bond Payable } & 1,500,000 & \\hline & \text { Loss on Early Retirement of Debt } & 75,000 & \\hline & \text { Cash } & & 1,575,000 \\hline & \begin{array}{l}\text { To record retirement of } \$ 1,500,000 \text { face } \\text { value bonds, originally issued at par, at 105) }\end{array} & & \\hline\end{array}

Bonds Payable Issued Between Interest Dates - Early Retirement

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