Q26E_1 - Horngren'S Financial And Managerial Accounting

Question

Retiring bonds payable before maturity

CoastalView Magazine issued $600,000 of 15-year, 5% callable bonds payable on July

31, 2018, at 94. On July 31, 2021, CoastalView called the bonds at 101. Assume annual

interest payments.

Requirements

1. Without making journal entries, compute the carrying amount of the bonds payable

at July 31, 2021.

2. Assume all amortization has been recorded properly. Journalize the retirement of

the bonds on July 31, 2021. No explanation is required.

Step-by-Step Solution

Answer

The discount on the bond payable is $36,000.

Step 1: Definition of the carrying amount

The carrying amount is the amount that comes after deducting a discount or adding a premium to the face value of the bonds.

Step 2: Calculation of the carrying amount of bonds payable

$\begin{array}{rcl}Carrying Amount& =& Face Value\times Issue Price\\ & =& \$600,000\times 94\%\\ & =& \$564,000\end{array}$

Hence the carrying amount of the bonds is $564,000.