cupola Fan Corporation issued 8%, $530,000, 10-year bonds for $507,000 on June 3
ID: 2537967 • Letter: C
Question
cupola Fan Corporation issued 8%, $530,000, 10-year bonds for $507,000 on June 30, 2018. Debt issue costs were $2,800. Interest is paid semiannually on December 31 and June 30. One year from the issue date (July 1, 2019), the corporation exercised its call privilege and retired the bonds for $515,000. The corporation uses the straight-line method both to determine interest expense and to amortize debt issue costs. Required 1. to 4. Prepare the journal entry to record the issuance of the bonds, the payment of interest and amortization of debt issue costs on December 31, 2018 & 2019, and the call of the bonds. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet 4 Record the payment of interest. Note: Enter debits before credits. Date General Journal Debit Credit December 31, 2018 nterest expense Discount on bonds payable Cash 1,290Explanation / Answer
1 to 4) Journal entries to record the issuance of bonds, the payment of interest and amortizartion of debt issuance costs is shown as follows:- (Amount in $)
Workings:-
i) The balance of bonds payable will be net of debt issuance cost of $2,800, hence on issuance of bonds the bonds payable account will be credited with amount of $504,200 ($507,000 - $2,800).
ii) Discount on bonds payable to be amortized is calculated as follows:-
Total discount to be amortized over 10 years (or 20 semiannual periods) = $530,000 - $504,200
= $25,800
Discount to be amortized on each semiannual period date = $25,800/20 = $1,290 (on June 30 and Dec 31)
Interest to be paid in cash = Face value of bonds*interest rate*(6 months/12 months)
= $530,000*8%*6/12 = $21,200
Total Interest Expense = Interest paid in cash+Discount amortized
= $21,200+$1,290 = $22,490
iii) On the date of retirement of bonds, the balance in bonds payable account is $506,780 ($504,200 + $1,290 + $1,290) and cash paid for bonds is $515,000. Therefore there is a loss of $8,220 ($515,000 - $506,780) on retirement of bonds.
No. Date General Journal Debit Credit 1 June 30, 2018 Cash 504,200 Bonds Payable (507,000 - 2,800) 504,200 (To record the issuance of bonds) 2 Dec. 31, 2018 Interest Expense (1,290+21,200) 22,490 Discount on Bonds Payable [(530,000-504,200)/20 periods] 1,290 Cash ($530,000*8%*6/12) 21,200 (To record the payment of interest) 3 June 30, 2019 Interest Expense (1,290+21,200) 22,490 Discount on Bonds Payable 1,290 Cash ($530,000*8%*6/12) 21,200 (To record the payment of interest) 4 June 30, 2019 Bonds Payable (504,200+1,290+1,290) 506,780 Loss on early extinguishment (515,000-506,780) 8,220 Cash 515,000 (To record the retirement of bonds)Related Questions
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