Question

Cupola Fan Corporation issued 8%, $590,000, 10-year bonds for $561,000 on June 30, 2018. Debt issue costs were $3,400. 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 $565,000. 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

No	Date	General Journal	Debit	Credit
1	June 30, 2018	Cash	557,600
		Discount & Debt issue costs	32,400
		Bonds Payable		590,000
2	December 31, 2018	Interest Expense	25,220
		Discount & Debt issue costs		1,620
		Cash		23,600
3	June 30, 2019	Interest Expense	25,220
		Discount & Debt issue costs		1,620
		Cash		23,600
4	July 01, 2019	Bonds Payable	590,000
		Loss on early extinguishment	4,160
		Discount & Debt issue costs		29,160
		Cash		565,000

Workings:

1. Issuance of bonds: Cash = $561,000 - $3,400 = $557,600

Discount & Debt issues costs = $590,000 - $561,000 + $3,400 = $32,400

2 & 3. Interest expense = $1,620 + $23,600 = $25,220

Discount & Debt issue costs = $32,400 / 20 = $1,620

Cash = 4% x $590,000 = $23,600

4.Discount & Debt issue costs = 9/10 x ($590,000 - $561,000 + $3400) = $29,160