On January 1, 2013, Shay issues $260,000 of 8%, 20-year bonds at a price of 96.75. Six years later, on January 1, 2019, Shay retires 20% of these bonds by buying them on the open market at 105.25. All interest is accounted for and paid through December 31, 2018, the day before the purchase. The straight-line method is used to amortize any bond discount.

On January 1, 2013, Shay issues $260,000 of 8%, 20-year bonds at a price of 96.75. Six years later, on January 1, 2019, Shay retires 20% of these bonds by buying them on the open market at 105.25. All interest is accounted for and paid through December 31, 2018, the day before the purchase. The straight-line method is used to amortize any bond discount.

1.

How much does the company receive when it issues the bonds on January 1, 2013?

Cash proceeds from sale of bonds at issuance ($260,000 × 96.75%) = $251,550  

2.

What is the amount of the discount on the bonds at January 1, 2013?

Explanation:

Discount at issuance
Par value	$	260,000
Cash issue price (from part 1)		(251,550	)
Discount at issuance	$	8,450

3.

How much amortization of the discount is recorded on the bonds for the entire period from January 1, 2013, through December 31, 2018?

The first six years (from 1/1/13 to 12/31/18) equals 30% of the bonds’ 20-year life. Therefore, the total amortization equals 30% of the total discount (since straight-line amortization is being used), which is $8,450 × 30%, or $2,535.

4.

What is the carrying (book) value of the bonds and the carrying value of the 20% soon-to-be-retired bonds as of the close of business on December 31, 2018?

Discount at issuance (from part 2)	$	8,450
Less amortization (from part 3)		(2,535	)
Remaining discount	$	5,915

   

	Entire Group				Retired 20%
Par value	$	260,000			$	52,000
Remaining discount		(5,915	)			(1,183	)
Carrying value	$	254,085			$	50,817

5.

How much did the company pay on January 1, 2019, to purchase the bonds that it retired?

Cash purchase price

($260,000 × 20%) × 105.25% = $54,730

6.

What is the amount of the recorded gain or loss from retiring the bonds?

Loss on retirement
Cash paid (from part 5)	$	54,730
Carrying value (from part 4)		(50,817	)
Loss on retirement	$	3,913

7.

Prepare the journal entry to record the bond retirement at January 1, 2019.