# Answered Essay: On June 30, 2009, Martinez Company issued 12% bonds with a par value of \$840,000 due in 20 years. They

On June 30, 2009, Martinez Company issued 12% bonds with a par value of \$840,000 due in 20 years. They were issued at 98 and were callable at 104 at any date after June 30, 2017. Because of lower interest rates and a significant change in the company’s credit rating, it was decided to call the entire issue on June 30, 2018, and to issue new bonds. New 8% bonds were sold in the amount of \$1,070,000 at 102; they mature in 20 years. Martinez Company uses straight-line amortization. Interest payment dates are December 31 and June 30.

 (a) Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2018. (b) Prepare the entry required on December 31, 2018, to record the payment of the first 6 months’ interest and the amortization of premium on the bonds.

(Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

 No. Account Titles and Explanation Debit Credit (a) (To record the redemption of the old issue) (To record the sale of the new issue) (b)

Old issue :

Issue price :840000*98/100 =823200

Discount : 840000-823200= \$ 16800

Amortisation per year : 16800/20 = \$ 840 per year

Number of years expired till 30 june 2018:9 years

Discount amortised during the period : 840*9= 7560

Unamortised discount : 16800-7560= 9240

 Date Account Debit credit 30 june 2018 Bond payable 840000 Loss on redemption of bond payable[873600+9240-840000] 42840 Discount on bond payable 9240 Cash [840000*104/100] 873600 [Being bond reedemed ] 30 june 2018 cash   [1070000*102/100] 1091400 Premium on bond payable 21400 Bond payable 1070000 [Being bond redeemed at premium]

b)

 Date Account Debit credit 31 december 2018 Interest expense [42800-42265] 42265 Premium on bond payable 535 cash [1070000*.08*6/12] 42800 [being first semiannual interest paid]

*premium amortisation :21400/20= 1070 per year

amortisation per semiannual month : 1070/2= 535

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