Question

Entries for Issuing and Calling Bonds; Gain

Emil Corp. produces and sells wind-energy-driven engines. To finance its operations, Emil Corp. issued $541,000 of 15-year, 12% callable bonds on May 1, 20Y1, at their face amount, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year.

Journalize the entries to record the following selected transactions:

20Y1
May 1	Issued the bonds for cash at their face amount.
Nov. 1	Paid the interest on the bonds.
20Y5
Nov. 1	Called the bond issue at 97, the rate provided in the bond indenture. (Omit entry for payment of interest.)

Issued the bonds for cash at their face amount.

20Y1, May 1

Paid the interest on the bonds.

20Y1, Nov. 1

Called the bond issue at 97, the rate provided in the bond indenture. (Omit entry for payment of interest.) For a compound transaction, if an amount box does not require an entry, leave it blank.

20Y5, Nov. 1

Answer 1

Date	General journal	Debit	Credit
20Y1, May 1	Cash	$541,000
	Bond payable		$541,000
	( To record issuance of bonds)

Date	General journal	Debit	Credit
20Y1, Nov. 1	Interest expense	$32,460
	Cash		$32,460
	( To record interest expense)

Semi annual interest expense = Fair value of bonds x Interest rate x 6/12

=541,000 x 12% x 6/12

= $32,460

Date	General journal	Debit	Credit
20Y5, Nov. 1	Bonds payable	$541,000
	Gain on redemption of bonds		$16,230
	Cash		$524,770
	( To record redemption of bonds)

Bonds were called at 97

Cash paid to redeems bonds = 541,000 x 97%

= $524,770

Gain on redemption of bonds = Fair value of bonds - Cash paid to redeems bonds

= 541,000-524,770

= $16,230