Question

Cupola Fan Corporation issued 8%, $470,000, 10-year bonds for $459,000 on June 30, 2018. Debt issue costs were $2,200. 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 $465,000. 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Answer and Explanation:

The Journal entries are shown below:-

1. Cash Dr, $456,800

Debt issue costs Dr, $2,200

Discount on bonds payable Dr, $11,000

To Bonds payable $470,000

(Being 8% bonds issued is recorded)

2. Interest expense Dr, $19,350 ($18,800 + $550)

To Discount on bonds payable $550 ($11,000 ÷ 20)

To Cash $18,800 ($470,000 × 8%) × 6 ÷ 12

(Being interest expense on bonds is recorded)

Debt issue expenses Dr, $110 ($2,200 ÷ 20)

To Debt issue costs $110

(Being debt issue expenses is recorded)

3. Interest expense Dr, $19,350

To Discount on bonds payable $550 ($11,000 ÷ 20)

To Cash $18,800 ($470,000 × 8%) × 6 ÷ 12

(Being interest expense on bonds is recorded)

Debt issue expenses $110 ($2,200 ÷ 20)

To Debt issue costs $110

(Being debt issue expenses is recorded)

4. 8% Bonds payable Dr, $470,000

Loss on early extinguishment of debt Dr, $6,880

To Discount on bonds payable $9,900 ($11,000 - 550 - 550)

To Debt issue costs Cash $1,980 ($2,200 - 110 - 110)

To Cash $465,000

(Being bonds extinguished is recorded)