Accounting Test 2 Question 1 On January 1, 2008 Kohl Corpora

Accounting Iitest 2question 1on January 1, 2008 Kohl Corporation Is

Prepare all entries related to the bond issue for 2008. Presented below are three independent situations: (a) Howell Corporation purchased $250,000 of its bonds on June 30, 2008, at 102 and immediately retired them. The carrying value of the bonds on the retirement date was $229,500. The bonds pay semiannual interest and the interest payment due on June 30, 2008, has been made and recorded. (b) Justice, Inc. purchased $200,000 of its bonds at 97 on June 30, 2008, and immediately retired them. The carrying value of the bonds on the retirement date was $196,500. The bonds pay semiannual interest and the interest payment due on June 30, 2008, has been made and recorded. (c) Starr Company has $80,000, 10%, 12-year convertible bonds outstanding. These bonds were sold at face value and pay semiannual interest on June 30 and December 31 of each year. The bonds are convertible into 40 shares of Starr $5 par value common stock for each $1,000 par value bond. On December 31, 2008, after the bond interest has been paid, $30,000 par value of bonds were converted. The market value of Starr's common stock was $38 per share on December 31, 2008. Prepare the journal entries to record the retirement or conversion of the bonds for each situation.

Paper For Above instruction

Accounting Iitest 2question 1on January 1 2008 Kohl Corporation Is

Introduction

The effective management of bonds and investments plays a crucial role in corporate finance. Accurate recording of bond issuance, retirements, conversions, and investments ensures transparency and compliance with accounting standards. This paper explores various journal entries related to bond transactions and short-term investments, illustrating their importance through detailed examples.

Bond Issue and Initial Recording

On January 1, 2008, Kohl Corporation issued $700,000, 8%, 10-year bonds at face value, with interest payable semiannually. The initial journal entry to record the bond issuance is:

Debit: Cash $700,000


Credit: Bonds Payable $700,000

This entry reflects the inflow of cash from bondholders and the corresponding liability created.

Retirement of Bonds

In situation (a), Howell Corporation purchased its bonds at a premium (102), meaning above face value, and then retired them early. The purchase at 102 on June 30, 2008, involves:

Debit: Bonds Payable $250,000


Credit: Cash $255,000


Credit: Premium on Bonds Payable $5,000

However, since the bonds are immediately retired, the journal entry reflects the retirement at the carrying value ($229,500), which was given, representing an amortized amount factoring in any premium or discount recognized.

The entry to retire bonds at a loss or gain considers the carrying value:

Debit: Bonds Payable $250,000


Debit: Premium on Bonds Payable (if applicable)


Credit: Cash $229,500


Credit: Gain on Retirement (if applicable)

Given the carrying value ($229,500) is less than the face value of the bonds ($250,000), a loss will be recognized:

Loss on bond retirement = $250,000 - $229,500 = $20,500

The journal entry:

Debit: Bonds Payable $250,000


Debit: Loss on Bond Retirement $20,500


Credit: Cash $229,500

In situation (b), Justice, Inc. purchased bonds at 97, or 97% of face value, and retired them immediately. The purchase involves:

Debit: Bonds Payable $200,000


Credit: Cash $194,000


Credit: Discount on Bonds Payable $6,000

The carrying value is $196,500, indicating the bonds at a discount. The retirement entry:

Debit: Bonds Payable $200,000


Debit: Discount on Bonds Payable $3,500


Credit: Cash $196,500

Here, a gain or loss would be recognized based on the carrying amount versus redemption amount. Since the bonds are retired at a carrying amount of $196,500 (as per the problem), the difference ($200,000 - $196,500 = $3,500) indicates a loss of that amount.

For the bond conversion by Starr Company in situation (c), the bonds are converted into common stock based on a specified ratio. The journal entry (assuming bonds are converted into 40 shares of Starr stock for each $1,000 bond at face value) involves:

Debit: Bonds Payable $30,000


Credit: Common Stock at par (e.g., 40 shares x $5 par x 6 bonds) = $1,200


Credit: Additional Paid-in Capital (balancing figure)

The market value of stock at conversion influences accounting treatment if the fair value of stock issued is relevant. Typically, bonds are recorded at face value unless under specific accounting policies.

Conclusion

Proper recording of bond transactions ensures accurate financial reporting. Retirements at a gain or loss and conversions into equity require precise journal entries reflecting the transaction’s economic substance. Companies must carefully assess each transaction's specifics, including premiums, discounts, and market values, to comply with accounting standards.

References

  1. Harrison, W. T., & Horngren, C. T. (2020). Financial & Managerial Accounting. Pearson.
  2. Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (16th Ed.). Wiley.
  3. Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis. Wiley.
  4. Currency, A. (2021). Accounting for Bonds and Long-Term Liabilities. Journal of Finance & Accounting.
  5. Financial Accounting Standards Board (FASB). (2018). Accounting standards updates (ASUs) on debt instruments.
  6. International Accounting Standard IAS 32 & 39, Financial Instruments: Recognition and Measurement.
  7. Whittington, G., & Wainwright, S. (2018). Principles of Financial Accounting. Routledge.
  8. Gibson, C. H. (2020). Financial Reporting & Analysis. South-Western Cengage Learning.
  9. Lee, T., & Mian, S. (2022). Advanced Corporate Finance. McGraw-Hill Education.
  10. Zweig, J. (2020). Understanding Investment and Financial Markets. Springer Publishing.

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