Question

Cupola fan corporation issued 10%, $400,000, 10-year bonds for $385,000 on june 30, 2016. debt issue costs were $1,500. interest is paid semiannually on december 31 and june 30. one year from the issue date (july 1, 2017), the corporation exercised its call privilege and retired the bonds for $395,000. the corporation uses the straight-line method both to determine interest expense and to amortize debt issue costs. required: 1. to 4. prepare the necessary journal entries. (if no entry is required for a transaction/event, select "no journal entry required" in the first account field.)

Answer 1

Given:
issued 10%, $400,000, 10-year bonds for $385,000 on June 30, 2016
debt issue costs were $1,500.
interest is paid semiannually on December 31 and June 30
one year from the issue date (july 1, 2017), the corporation exercised its call privilege and retired the bonds for $395,000
the corporation uses the straight-line method both to determine interest expense and to amortize debt issue costs.

Journal entries:
Debit Credit
June 30, 2016 Cash 383,500
Bonds payable 383,500
Dec. 31, 2016 Interest expense 20,825
Bonds payable 825
Cash 20,000
June 30, 2017 Interest expense 20,825
Bonds payable 825
Cash 20,000
June 30, 2017 Bonds payable 385,150
Loss on early extinguishment 9,850
Cash 395,000

*
Interest is computed by: 400,000 * 10% = 40,000 per annum
40,000 / 2 = 20,000 per semi-annual. Every Dec. 31 and June 30

400,000 - 385,000 = 15,000 discount
15,000 discount + 1,500 debt issue cost = 16,500
16,500 * 10% = 1,650 amortization per annum
1,650 / 2 = 825 amortization per semi-annual

Bonds payable total = 383,500 + 825 + 825 = 385,150
Loss on early extinguishment = 395,000 - 385,150 = 9,850