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agasfer [191]
3 years ago
15

King Company issued bonds with a face amount of $1,600,000 in 2015. As of January 1, 2020, the balance in Discount on Bonds Paya

ble is $4,800. At that time, King redeemed the bonds at 102.Required:Assuming that no interest is payable, make the entry to record the redemption.
Business
1 answer:
zimovet [89]3 years ago
5 0

Answer:

January 1, 2020

Bonds Payable                                          1600000 Dr

Loss on Redemption of bonds                 36800 Cr

     Discount on Bonds Payable                        4800 Cr

     Cash                                                              1632000 Cr

Explanation:

The redemption of bonds before the maturity usually requires a payment for redemption which is a certain percentage of its face value. It is usually higher than the face value. The above bonds are redeemed at 102 which means at 102% of the face value of the bonds. Thus, the cash paid to redeem the bonds is,

Cash = 1600000 * 102%  =  1632000

The bonds have a carrying value, which is the face value less discount or add premium, of,

Carrying value = 1600000 - 4800  =  $1595200

If they are redeemed for an amount in excess of the carrying value, they are redeemed at a loss.

The loss on redemption is,

Loss = 1595200 - 1632000 = $36800

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a 2-year treasury security currently earns 6.75 percent. over the next two years,the real interest rate is expected to be 3.18 p
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The maturity risk premium on the 2-year Treasury security is C. 1.39%

Using this formula

rd = r* + IP + MRP

Where

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