On January 1, 2008, Pear Corp. issued 3,000 of its 6%, $1,000 bonds for $2,080,0

Question

On January 1, 2008, Pear Corp. issued 3,000 of its 6%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2018, but were callable at 103 any time after December 31, 2011. Interest was payable semiannually on July 1 and January 1. On July 1, 2013, Pear Corp. called all of the bonds and retired them. The bond premium discount was amortized on a straight-line basis. Prepare the journal entry to record this earlyextinguishment of debt.

Note: For each line item of the journal entry write whether it is a Dr. or Cr., the account name, and amount.

Explanation / Answer

Face Value of Bond 3000000 Issue Price 2080000 Discount on issue 920000 Discount on issue 920000 Total discount Amortized =(920000/20)*11 ie 11 amortization 506000 Unamortized Discount 414000 Carrying Value Of bond On the date of call Bond Payable 3000000 Unamortized Discount 414000 Carrying Value Of bond On the date of call 2586000 Carrying Value Of bond On the date of call 2586000 Call value of bond 3000,000*1.03 3090000 Loss On call of bond -504000 Journal enty DR CR Bond Payable 3000000 Loss On call of bond 504000 Discount on issue 414000 Cash 3090000

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