Question

Entries for Issuing and Calling Bonds; Loss Rushton Corp., a wholesaler of music equipment, issued $11,000,000 of 20-year, 9% callable bonds on March 1, 2011, at their face amount, with interest payable on March 1 and September 1. The fiscal year of the company is the calendar year. Joumalize the entries to record the following selected transactions: 2011 Mar. 1 Issued the bonds for cash at their face amount. Paid the interest on the bonds. Sept. 1 20YS Sept. 1 Called the bond issue at 101, the rate provided in the bond indenture. (Omit entry for payment of interest.)

Answer 1

Issued the bonds for cash at their face amount

Date	Account Titles and Explanation	Debit	Credit
20Y1 Mar. 1	Cash	$11,000,000
	Bonds Payable		$11,000,000
	(To record issue of bonds)

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Paid the interest on the bonds

Date	Account Titles and Explanation	Debit	Credit
20Y1 Sept. 01	Interest expense         [$11,000,000 x 9% x (6 months / 12 months)]	$495,000
	Cash		$495,000
	(To record payment of semi-annual interes on bonds)

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Called the bond issue at 101

Date	Account Titles and Explanation	Debit	Credit
20Y5 Sept. 01	Bonds Payable	$11,000,000
	Loss on Redemption of Bonds       [Refer working note]	$110,000
	Cash                                          [par value x 101% = $11,000,000 x 101%]		$11,110,000
	(To record the redemption of bonds)

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Working Note - Computation of gain (or) loss on early retirement of the bonds

Amount paid for redemption                                                [Par value x 101% = $11,000,000 x 101%]	$11,110,000
Less: Carrying value (or) book value of the bonds	$11,000,000
Loss on redemption	$110,000

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Note: To redeem the bonds, the company has paid an $11,110,000 which is greater than the carrying value of the bonds. So, it incurred loss on redemption