Homework SourseP147B L0345 Entries for Life Cycle of Bonds On June 1 2017 R
P14-7B (L03,4,5) (Entries for Life Cycle of Bonds) On June 1, 2017, Royal Palm Company sold 6,000 of its 6%, 20-year, $1,000 face value bonds at 96. Interest payment dates are December 1 and June 1, and the company uses the straight-line method of bond discount amortization. On February 1, 2018, Royal Palm took advantage of favorable prices of its stock to extinguish 4,000 of the bonds by issuing 500,000 shares of its $1 par value common stock. At this time, the accrued interest was paid in cash. The company’s stock was selling for $8.50 per share on February 1, 2018.
Instructions
Prepare the journal entries needed on the books of Royal Palm Company to record the following.
(a) June 1, 2017: issuance of the bonds.
(b) December 1, 2017: payment of semiannual interest.
(c) December 31, 2017: accrual of interest expense.
(d) February 1, 2018: extinguishment of 4,000 bonds. (No reversing entries made.)
Solution
DATE
EXPLANATION
DEBIT
CREDIT
1-Jun
CASH
576000
DISCOUNT ON BONDS PAYABLE
24000
BONDS PAYABLE
600000
1-Dec
INTEREST EXPENSE
18600
CASH
18000
DISCOUNT ON BONDS PAYABLE
600
31-Dec
INTEREST EXPENSE
3000
ACCRUED INTEREST EXPENSE
3000
1-Feb
BONDS PAYABLE
400000
(600000*4000)/6000
INTEREST EXPENSE
1000
(400000*3%)/12
ACCRUED INTEREST EXPENSE
2000
(3000/6000)*4000
GAIN ON EXTINGUISHMENT OF BONDS
3865600
500000+3750000+15600-400000
COMMON STOCK
500000
500000*1
ADDITIONAL PAID IN CAPITAL-EQUITY
3750000
500000*7.5
DISCOUNT ON BONDS PAYABLE
15600
(23400/6000)*4000
CASH
3000
1000+2000
| DATE | EXPLANATION | DEBIT | CREDIT | ||
| 1-Jun | CASH | 576000 | |||
| DISCOUNT ON BONDS PAYABLE | 24000 | ||||
| BONDS PAYABLE | 600000 | ||||
| 1-Dec | INTEREST EXPENSE | 18600 | |||
| CASH | 18000 | ||||
| DISCOUNT ON BONDS PAYABLE | 600 | ||||
| 31-Dec | INTEREST EXPENSE | 3000 | |||
| ACCRUED INTEREST EXPENSE | 3000 | ||||
| 1-Feb | BONDS PAYABLE | 400000 | (600000*4000)/6000 | ||
| INTEREST EXPENSE | 1000 | (400000*3%)/12 | |||
| ACCRUED INTEREST EXPENSE | 2000 | (3000/6000)*4000 | |||
| GAIN ON EXTINGUISHMENT OF BONDS | 3865600 | 500000+3750000+15600-400000 | |||
| COMMON STOCK | 500000 | 500000*1 | |||
| ADDITIONAL PAID IN CAPITAL-EQUITY | 3750000 | 500000*7.5 | |||
| DISCOUNT ON BONDS PAYABLE | 15600 | (23400/6000)*4000 | |||
| CASH | 3000 | 1000+2000 |
