Question

Three years ago American Insulation Corporation issued 10 percent, $1,000,000, 12-year bonds for $870,000. Debt issue costs were $5,000. American Insulation exercised its call privilege and retired the bonds for $940,000. The corporation uses the straight-line method both to determine interest and to amortize debt issue costs.

Prepare the journal entry to record the call of the bonds.

Answer 1

discount amount amortized till now = (1,000,000-870,000) /12 * 3 years

=>$32,500.

remaining discount = 130,000 -32,500 =>97,500

debt issue costs amotised till now = (5000)/12 * 3 years

=>$1,250.

remaining debt issue cost = 5000-1250 =>3750

the following is the journal entry:

bonds payable	1,000,000
Loss on early call	41,250
............To discount on bonds payable		97,500
.............To debt issue costs		3,750
............To cash a/c		940,000
(loss amount = 940,000+3750+97500-1,000,0000)=>41,250)