Question

1. On January 2, 2020, Drambuie Corp. issued $1,000,000 of 6% bonds at $865,795 due December 31, 2029. The market rate of interest was 8% and interest on the bonds are payable annually each December 31. The discount on the bonds is being amortized on an effective interest basis. The bonds are callable at 101 and on January 1, 2022, Drambuie called the bonds and retired them.

A. Compute the gain or loss on the early retirement of the bonds on January 1, 2022. (Round all value to whole dollars.)

B. Show the journal entry to record the retirement of the bonds on January 1, 2022.

Answer 1

	Date	Cash	interest	Discount	Carrying
		interest	expense	amortized	value
	1/2/2020				865,795
	12/31/2020	60000	69264	9264	875,059
	12/31/2021	60000	70005	10005	885,063
a)	Loss or gain on redemption
	carrying value of bonds				885,063
	cash paid on redemption				1010000
	loss on redemption				124,937	answwer
b)	Journal Entry
	Date	Account titles & Explanations				Debit	Credit
	1/1/2022	Bonds payable				1,000,000
		Loss on redemption				124,937
		Discount on bonds					114,937
		cash					1,010,000