On July 1, Aloha Co. exercises a call option that requires Aloha to pay $408,000 for its outstanding bonds that have a carrying value of $412,000 and par value of $400,000. The company exercises the call option after the semiannual interest is paid the day before on June 30.

The journal entry for the following is:

Explanation:

Note: Requirement is record the retirement of bonds maturity.

Bonds Payable A/c ... Dr $400,000

Premium on bonds payable A/c ... Dr $12,000

Cash A/c ... Cr $408,000

Gain on retirement of bonds A/c ... Cr $4,000

Working Note:

Given,

Book value of bonds retirement day is $412,000

Face value of bond is $400,000

Call Price of the bonds is $408,000

Premium on bonds payable = Book value - Face value

= $412,000 - $400,000

= $12,000

Gain on redemption of bonds = Book value - Call Price

= $412,000 - $408,000

= $4,000