Answered Essay: Problem 14-4

Problem 14-4

Sheridan Company issued its 8%, 25-year mortgage bonds in the principal amount of $3,040,000 on January 2, 2003, at a discount of $152,000, which it proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 105% of the principal amount, but it did not provide for any sinking fund.

On December 18, 2017, the company issued its 10%, 20-year debenture bonds in the principal amount of $4,150,000 at 102, and the proceeds were used to redeem the 8%, 25-year mortgage bonds on January 2, 2018. The indenture securing the new issue did not provide for any sinking fund or for redemption before maturity.

(a) Prepare journal entries to record the issuance of (1) the 10% bonds and (2) the redemption of the 8% bonds. (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. Date Account Titles and Explanation Debit Credit
(1) December 18, 2017
(2) January 2, 2018

(b) Indicate the income statement treatment of the gain or loss from redemption.

The gainloss

is reported as Extraordinary GainOrdinary LossOrdinary GainExtraordinary Loss

.

Expert Answer

 

No. Date Account Titles and Explanation Debit Credit
1 18-Dec-17
Cash (4150000 x 102%)
4233000
10% Bonds payable
4150000
Premium on issue of 10% Bonds payable
83000
(Being bonds issued at premium)
2 2-Jan-18
8% Bonds payable
3040000
Loss on redemption of bonds (Bal. Fig.)
212800
Cash(3040000 x 105%)
3192000
Discount on issue of 8% Bonds payable(152000 x 10/25)
60800
(Being bonds redeemed at premium)
The loss to be shown as loss from ordinary activity.
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