The following section is taken from Budke Corp.’s balance sheet at December 31,

Question

The following section is taken from Budke Corp.’s balance sheet at December 31, 2010.
Current liabilities
Bond interest payable $ 72,000

Long-term liabilities
Bonds payable, 9%, due January 1, 2015 $ 1,600,000

Interest is payable semiannually on January 1 and July 1.The bonds are callable on any
interest date.

Instructions:

(a) Journalize the payment of the bond interest on January 1, 2011.

(b) Assume that on January 1, 2011, after paying interest, Budke calls bonds having
a face value of $600,000.The call price is 104. Record the redemption of the bonds.

(c) Prepare the entry to record the payment of interest.

Explanation / Answer

Prepare the entry to record the payment of interest on July 1, 2010, assuming no previous accrual of interest on the remaining bonds. You had bonds payable of $1,600,000, but on January 1, 2010, you called bonds having a face value of $600,000, so now you're left with bonds having a face value of $1m, so interest for this period of 6 mths = $1,000,000 x 9% x 6/12 = $45,000 July 1 Bond interest expense $45,000 Cash $45,000

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