Question

Entries for Issuing and Calling Bonds; Gain

Emil Corp. produces and sells wind-energy-driven engines. To finance its operations, Emil Corp. issued $1,482,000 of 10-year, 14% 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

Journal

Date	Account Title and Explanation	Debit	Credit
May 1, 20Y1	Cash	1,482,000
	Bonds payable		1,482,000
	(To record issue of bonds at par)
Nov 1, 20Y1	Interest expense	103,740
	Cash		103,740
	(To record interest payment)
Nov 1, 20Y5	Bonds payable	1,482,000
	Gain on redemption of bonds		44,460
	Cash		1,437,540
	(To record retirement of bonds)

Interest expense to be recorded on Nov 1 = Par value of bonds x Interest rate x 6/12

= 1,482,000 x 14% x 6/12

= $103,740

Call price = 97

Cash to be paid for retirement of bonds = Par value of bonds x Call price

= 1,482,000 x 97%

= $1,437,540

Gain on redemption of bonds = Par value of bonds - Cash paid on retirement on bonds

= 1,482,000 - 1,437,540

= $44,460

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