Question

Three years ago American Insulation Corporation issued 10 percent, $930,000, 10-year bonds for $835,000. American Insulation exercised its call privilege and retired the bonds for $920,000. The corporation uses the straight-line method to determine interest.

Required:
1. Prepare the journal entry to record the call of the bonds. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Dr. Bonds payable $930,000

Dr. Loss on premature bond redemption $56,500

Cr. Discount on bonds payable $66,500

Cr. Cash $920,000

Step-by-step explanation:

The discount upon issuance of bond three years ago was :

$930000- $835000=$95000

However,the discount amortized for three years is:

$95000*3/10=$28500.

The discount not yet amortized as an expense is $66500($95000-$28500)

Ultimately, the unamortized discount is credited to income statement upon redemption as an income.

Bonds payable is debited with the par value of the bond $930000

Cash is credited with actual cash settlement which is $920000

The unamortized discount of $66500 is credited to income statement

Leaving a balance figure of $56500 recorded as loss upon premature redemption of bond by debiting income statement.