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26 August, 20:54

Cupola Fan Corporation issued 12%, $430,000, 10-year bonds for $412,000 on June 30, 2018. Debt issue costs were $1,800. 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 $415,000. 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.

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  1. 26 August, 21:02
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    cash 410,200 debit

    discount on bonds payable 18,000 debit

    flotation cost 1,800 debit

    bonds payable 430,000 credit

    June 30th 2018:

    Interest expense 26,780

    discount on bonds payable 900

    flotation cost 90

    cash 25,800

    December 31th 2018:

    Interest expense 26,780

    discount on bonds payable 900

    flotation cost 90

    cash 25,800

    June 30th 2019:

    Interest expense 26,780

    discount on bonds payable 900

    flotation cost 90

    cash 25,800

    bonds payable 430,000

    redemption of the bonds:

    loss on redemption 1,830 debit

    discount on bond payable 15,300 credit

    flotation cost 1,530 credit

    cash 415,000 credit

    Explanation:

    Issuance:

    We will subtract from the issued cost the cost.

    issued at 412,000

    face value 430,000

    discount on bonds payable 18,000

    payments:

    580,000 x 0.06 = 25800 proceeds

    amortization on flotation cost 1,800 / 20 = 90

    on discount on bonds 18,000 / 20 = 900

    Call:

    disbursement 415,000

    carrying value of the bonds:

    discount on bond payable 18,000 - 900 - 900 - 900 = 15,300

    flotation cost 1,800 - 90 - 90 - 90 = 1,530

    bonds payable 430,000

    discount on bond payable (15,300)

    flotation cost (1, 530)

    net 413, 170

    result on redemption:

    413,170 - 415,000 = - 1,830 loss
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