Bonds Exercise (CH 10)

1) Devor Corporation issues 100, five-year, 10%, $1,000 bonds dated January 1, 2014, at 100 (100% of
face value).
a) The entry to record the sale is:
Jan. 1 Cash

100,000

Bonds Payable

100,000

(To record sale of bonds at face value)

*Error in Book shows only $10,000
b) Entry to record first year bond interest, assume that interest is payable annually on January 1
Dec. 31 Interest Expense

10,000

Interest Payable

10,000

(To accrue bond interest)

c) Entry to records the payment of interest on January 1.
Jan. 1 Interest Payable

10,000

Cash

10,000

(To record payment of bond interest)

2) Bond Issued at a discount:

on January 1, 2014, Candlestick Inc. sells $100,000, five-year, 10% bonds at 98 (98% of face value)
with interest payable on January 1.
a) The entry to record the issuance:
Jan. 1 Cash

98,000

Discount on Bonds Payable

2,000

Bonds Payable
(To record sale of bonds at a discount)
b) Show Balance Sheet carrying value (book value) at time of issuing:
Long-term liabilities
Bonds Payable
Less: Discount on Bonds Payable
Book/Carrying Value

$100,000
$2,000
$98,000

100,000

3) Bond issued at a premium:

Candlestick Inc. bonds described above sell at 102 (102% of face value) rather than at 98.
a) The entry to record the sale is:
Jan. 1 Cash
102,000
Bonds Payable

100,000

Premium on Bonds Payable

2,000

(To record sale of bonds at a premium)

b) Show Balance Sheet carrying value (book value) at time of issuing:
Long-term liabilities
Bonds Payable

$100,000

Add: Premium on Bonds Payable

$2,000

Book/Carrying Value

$102,000

4) Redeeming Bond sold at face value from (1):

Bonds Payable

100,000

Cash

100,000

(To record redemption of bonds at maturity)

5) Redeeming bond at a loss:
Candlestick Inc., having sold its bonds at a premium, redeems the $100,000 face value bonds at 103
after paying the annual interest. Assume that the carrying value of the bonds at the redemption date is
$100,400 (principal $100,000 and premium $400). Candlestick records the redemption at the end of the
fourth interest period (January 1, 2018) as:
Face value: $100,000
Cash paid by Candlestick at time of redemption: $100,000 x 1.03 = $103,000
The Carrying Value at time of redemption: $100,400 (Given)
Unamortized premium or discount: CV FV = $100,400 - $100,000 = $400 Premium
Loss or gain on redemption: CV Cash Paid = $100,400 - $103,000 = $2,600 Loss
The journal entry to record the redemption:
Jan. 1 Bonds Payable
Premium on Bonds Payable
Loss on Bond Redemption
Cash
(To record redemption of bonds at 103)

100,000
400
2,600
103,000

6) Redeeming bond at a gain:

E10-14 B
Youngman, Inc., redeemed $170,000 face value, 12.5% bonds on June 30, 2014, at 98. The carrying value
of the bonds at the redemption date was $184,000. The bonds pay annual interest, and the interest
payment due on June 30, 2014, has been made and recorded.
Face value: $170,000
Cash paid by Candlestick at time of redemption: $170,000 x .98 = $166,600
The Carrying Value at time of redemption: $184,000 (Given)
Unamortized premium or discount: CV FV = $184,000 - $170,000 = $14,000 Discount
Loss or gain on redemption: CV Cash Paid = $184,000 - $166,600 = $17,400 Gain
The journal entry to record the redemption:
June 30

Bonds Payable
Premium on Bonds Payable
Cash ($170,000 X 98%)
Gain on Bond Redemption

170,000
14,000
166,600
17,400

Additional Examples from book:

Exercise 10-12
Assume that the following are independent situations recently reported in the Wall Street Journal.
1. General Electric (GE) 7% bonds, maturing January 28, 2015, were issued at 111.12.
2. Boeing 7% bonds, maturing September 24, 2029, were issued at 99.08.
(c) Prepare the journal entry to record the issue of each of these two bonds, assuming each company
issued $800,000 of bonds in total. (Credit account titles are automatically indented when
amount is entered. Do not indent manually.)
No.

Account Titles and Explanation

Cash

Debit

Credit

888,960

Bonds Payable

800,000

Premium on Bo

88,960

Cash

792,640

Discount on B

7,360

Bonds Payable

800,000

Exercise 10-14
The situations presented here are independent of each other.
For each situation, prepare the appropriate journal entry for the redemption of the bonds.
Pelfer Corporation redeemed $140,000 face value, 9% bonds on April 30, 2014, at 101. The carrying
value of the bonds at the redemption date was $126,500. The bonds pay annual interest, and the
interest payment due on April 30, 2014, has been made and recorded. (Credit account titles are
automatically indented when amount is entered. Do not indent manually.)
Date
Apr. 30

Account Titles and Explanation

Debit

Bonds Payable

140,000

Loss on Bond

14,900

Credit

Cash

141,400

Discount on B

13,500

Youngman, Inc., redeemed $170,000 face value, 12.5% bonds on June 30, 2014, at 98. The carrying
value of the bonds at the redemption date was $184,000. The bonds pay annual interest, and the
interest payment due on June 30, 2014, has been made and recorded. (Credit account titles are
automatically indented when amount is entered. Do not indent manually.)
Date
Jun. 30

Account Titles and Explanation

Debit

Bonds Payable

170,000

Premium on Bo

14,000

Credit

Cash

166,600

Gain on Bond

17,400

Terms:
Issuing or Selling: These terms mean that a company is borrowing money. Cash is received by the
business. This constitutes a loan by the business with the lean terms specified on the bond certificate.
Redeeming: This term refers to the borrower paying off the loan. Cash is paid by the business. When the
redemption is early, before the maturity date of the bond, the business pays the amount of cash at the
bonds market price. If the bond is at maturity, the face value is paid.
Amortization: Allocating the bond premium or discount over the life of the bond. Amortizing the bond
premium reduces interest expense while amortizing the bond discount increases interest expense.
Carrying Value or Book Value: Bonds Payable less unamortized discount on bonds payable or Bonds
Payable add unamortized premium on bonds payable.

Accounts:
Premium on Bonds Payable: Add balance to Bonds Payable on Balance Sheet. Liability account. (CR)
Discount on Bonds Payable: Less balance from Bonds Payable on Balance Sheet. Contra Liability to
Bonds Payable. (DR)