Question

Three years ago American Insulation Corporation issued 10 percent, $910,000, 8-year bonds for $825,000. Debt issue costs were $5,000. American Insulation exercised its call privilege and retired the bonds for $900,000. The corporation uses the straight-line method both to determine interest and to amortize debt issue costs.

Required:

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

Answer 1

Answer:

                                        Dr.           Cr.

Bond Payable            $910,000

Loss on retirement    $43,125

Discount                                      $53,125

Cash                                            $900,000

Explanation:

The discount given on the issuance of the bond is amortized over the period of bond till maturity. On the call date on 3 years had passed so, the remaining balance of 5 year will be adjusted in the calculation of profit / loss on the retirement of bond.

Discount on issuance of bond = $910,000 - $825,000 = $85,000

Discount amortization per year = $85,000 / 8 = $10,625

Total Discount amortized after 3 years = $10625 x 3 = $31,875

Un-amortized Bond discount = $85,000 - $31,875 = $53,125