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    of 7

    E14.

    6 Spencer Company

    Amortization schedule of discount (Effective interest method) (12%)


    Date Opening balance Interest paid in cash Interest expense Discount amortized
    (10% x face amount) (12% x outstanding (3) = (2) - (1)
    (1) balance) (2)
    Jan. 1, 2019 £ 2,783,724.00
    Jan. 1, 2020 £ 2,783,724.00 £ 300,000 £ 334,046.88 £ 34,046.88
    Jan. 1, 2021 £ 2,817,770.88 £ 300,000 £ 338,132.51 £ 38,132.51
    Jan. 1, 2022 £ 2,855,903.39 £ 300,000 £ 342,708.41 £ 42,708.41
    Jan. 1, 2023 £ 2,898,611.80 £ 300,000 £ 347,833.42 £ 47,833.42
    Jan. 1, 2024 £ 2,946,445.22 £ 300,000 £ 353,554.78 £ 53,554.78
    d) (12%)
    Unamortized Discount Outsatnding balance

    Opening balance + (3)

    £ 216,276.00 £ 2,783,724.00
    £ 182,229.12 £ 2,817,770.88
    £ 144,096.61 £ 2,855,903.39
    £ 101,388.20 £ 2,898,611.80
    £ 53,554.78 £ 2,946,445.22
    £ - £ 3,000,000.00
    E14.14 (Entry of retirement of bond; Bond issue costs)

    a. Calculation of Issue Price of Bonds :


    Issue Price of Bonds = Present Value of Face amount of Bonds + Present Value of Interest Payments
    Face amount of Bonds = $1,500,000
    Present Value Factor = 0.35218

    Present Value of Face amount of Bonds = $1,500,000 x 0.35218 = $528,270


    Yearly Interest Payment = $1,500,000 x 10% = $150,000
    Present Value Annuity Factor = 5.88923
    Present Value of Interest Payments = $150,000 x 5.88923 = $883,374.5
    Issue Price of Bonds = $528,270 + $883,374.5 = $1,411,644.5
    So, Issue Price of Bonds = $1,411,645

    b. Preparation of amortization schedule

    Date Opening balance Interest paid in cash Interest expense

    (10% x face amount) (11% x outstanding


    (1) balance) (2)

    Jan. 2, 2016 $ 1,411,645.00 $ - $ -


    Dec. 31, 2016 $ 1,411,645.00 $ 150,000.00 $ 155,280.95
    Dec. 31, 2017 $ 1,416,925.95 $ 150,000.00 $ 155,861.85
    Dec. 31, 2018 $ 1,422,787.80 $ 150,000.00 $ 156,506.66
    Dec. 31, 2019 $ 1,429,294.46 $ 150,000.00 $ 157,222.39
    Dec. 31, 2020 $ 1,436,516.85 $ 150,000.00 $ 158,016.85

    c. Calculation of amount of loss to be recognized


    Retirement Value of Bonds = $1,000,000 x 101% = $1,010,000
    Carrying Value of $1,500,000 bonds as on January 2, 2019 = $1,429,295
    Carrying Value of $1,000,000 bonds as on January 2, 2019 = $1,429,295 x (1,000,000 / 1,500,000) = $952,863
    Loss to be recognized = Retirement Value of Bonds - Carrying Value of $1,000,000 bonds
    = $1,010,000 - $952,863 = $57,137
    So,Loss to be recognized = $57,137

    Journal Entery To record Retirement :


    Date Debit Credit
    2-Jan-19 Bonds Payable 1,000,000
    Loss on retirement of
    bonds 57,137
    Discount on bonds Payable 47,137
    Cash 1,010,000
    Discount on bonds Payable as on 2 January, 2016 = Face amount of Bonds - Issue Price of Bonds
    = $1,500,000 - 1,411,645 = $88,355
    Discount amortized during 2016, 2017, 2018
    = 5281 + 5862 + 6506 = $17,649
    Discount on bonds Payable as on 2 January, 2019
    = $88,355 - $17,649 = $70,706
    Discount on bonds Payable as on 2 January, 2019 on $1,000,000 bonds = $70,706 x (1,000,000 / 1,500,000)
    = $47,137
    osts)

    alue of Interest Payments

    Discount amortized Outsatnding balance

    (3) = (2) - (1) Opening balance + (3)

    $ - $ 1,411,645.00
    $ 5,280.95 $ 1,416,925.95
    $ 5,861.85 $ 1,422,787.80
    $ 6,506.66 $ 1,429,294.46
    $ 7,222.39 $ 1,436,516.85
    $ 8,016.85 $ 1,444,533.71

    00,000 / 1,500,000) = $952,863


    ue Price of Bonds

    706 x (1,000,000 / 1,500,000)


    E14.16 (Entries for retirement and Issuance of Bonds)

    Calculation of loss on redemption Amount Amount


    Redemption of old bonds 5,200,000
    Less: Net carrying amount of bonds redeemed
    Par value of bonds 5,000,000
    Unamortized discount 100,000 4,900,000
    Loss on redemption 300,000

    To record redemption of bonds payable Debit Credit


    Bond payable 5,000,000
    Loss on redemption 300,000
    Discount on bonds payable 100,000
    Cash 5,200,000

    To record issue of new bonds


    Cash 5,050,000
    Premium on bonds payable 50,000
    Bonds payable 5,000,000

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