Question

Three years ago american insulation corporation issued 10 percent, $820,000, 10-year bonds for $780,000. debt issue costs were $4,000. american insulation exercised its call privilege and retired the bonds for $810,000. the corporation uses the straight-line method both to determine interest and to amortize debt issue costs.

Answer 1

Answer and Explanation:

The journal entry is shown below:

But before the following calculations are required

The Unamortized cost of the Issue is

= ($4,000 ÷ 10 years) × 7 years

= $2,800

Now

Discount on Bond is

= $820,000 - $780,000

= $40,000

And,

Unamortized Discount is

= ($40,000 ÷ 10 Years) × 7years

= $28,000

Now

Carrying Value of Bond after 3 Years is

= $820,000 - ($28,000 + $2,800)

= $789,200

And,

Loss on Early Retirement of Bond is

= $810,000  $-789,200

= $20,800

Now

Journal Entry is

Bond Payable   $820,000  Dr.

Loss on Early Retirement of Bond  $20,800

      To Discount on Bond Payable  $28,000

      To Cost of Issue of Bond Payable  $2,800  

     To Cash or Bank   $810,000

(being the call on bond is recorded)