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AP10-5 Recording Bond Issuance, Interest Expense, and Effects of Bond Redemption of Financial Statements (Effective-Interest

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1. In the books of Ashraf Ltd. :

Date Account Titles Debit Credit
$ $
June 30, 2017 Cash 4,229,376
Premium on Bonds Payable 229,376
Bonds Payable 4,000,000
To record issuance of bonds payable

2.

Ashraf Ltd.
Statement of Financial Position ( Partial )
December 31, 2017
Liabilities
Long Term Liabilities
Bonds Payable
Par Value 4,000,000
Premium on Bonds Payable 226,257.28 4,226,257.28

3.

Date Account Titles Debit Credit
$ $
June 30, 2018 Interest Expense 126,787.71
Premium on Bonds Payable 3,212.29
Interest Payable 130,000
Cash 260,000
To record payment on interest on bonds

4.

Date Account Titles Debit Credit
$ $
June 30, 2018 Bonds Payable 4,000,000
Premium on Bonds Payable 223,045
Gain on Redemption of Bonds 143,045
Cash 4,080,000

Gain on redemption of $ 143,045 would be reported as other income on the statement of earnings, and deducted in the Operating Activities section of the statement of cash flows, while, $ 4,080,000 would be reported as an outflow under the Financing Activities section as cash paid to redeem bonds payable.

5. The market interest rate has decreased further, causing the bond price to fall. It would make financial sense to sell the bonds at a gain.

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