Question

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.

Answer 1

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

Step-by-step 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