Verrecchia Inc., has a fiscal year end on 12/31/2018. Verrecchia is authorized t

Question

Verrecchia Inc., has a fiscal year end on 12/31/2018. Verrecchia is authorized to issue $800,000 of 9%, 5-year bonds dates April 1, 2019. These bonds pay interest is paid each April 1 and Oct 1. The bonds can be called (i.e., repurchaed by the issuer) after April 1, 2020 at a price of 104. Requirements Assume these bonds were sold on April 1, 2019, when the market interest rate was 8%. Record the necessary journal entries to: 1) Record the issuance of the bonds on April 1, 2019 2) Record the interest expense in the income statement in 2019. Note, firm reports on a quarterly basis and the dates on which the interest is paid (the case paid) do no coincide with the end of the fiscal quarters. 3) Record the repurchase of the bonds if they are called back at the close of business on April 2, 2020 at 104. 4) In part (3), where will the gain/loss on this transaction be reported in the Q2 2020 income statement?

Explanation / Answer

1) CLOSING ENTRIES: Date Accounts Title and Explanations Debit Credit Service revenue 54000 Income summary 54000 (To close revenue account to income summary) Income summary 51000 Salaries expense 20000 Advertising expense 13000 Rent expense 10000 Utilities expense 8000 (To close expense accounts to income summary) Income summary 3000 Retained earnings 3000 (To close net income to retained earnings) Retained earnings 4000 Dividends 4000 (To close dividends account) 2) Retained earnings: Beginning balance 9000 Add: Net income for the year 3000 Less: Dividends paid 4000 Ending balance of retained earnings 8000 Answer 3) POST CLOSING TRIAL BALANCE Account Debit Credit Cash 12000 Supplies 39000 Prepaid rent 30000 Accounts payable 3000 Noes payable 30000 Common stock 40000 Retrined earnings 8000 Total 81000 81000

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