Answer:
Prepare the journal entry to record the bond retirement on January 1, 2016.
total bond premium = $500,000 x 1.06 = $530,000
carrying bond value = $530,000 - $5,000 = $525,000
gain/loss = carrying value - cash paid = $525,000 - $515,000 = $10,000
Keep in mind the carrying value – cash paid to retire bonds = gain or loss on bond retirement
Dr Bonds payable 500,000
Dr Premium on bonds payable 25,000
Cr Cash 515,000
Cr Gain on retirement of bonds 10,000
Apr. 8: Issued a $5,000, 60-day, six percent note payable in payment of an account with Bennett Company.
Dr Accounts payable 5,000
Cr Notes payable 5,000
May 15: Borrowed $40,000 from Lincoln Bank, signing a 60-day note at nine percent.
Dr Cash 40,000
Cr Notes payable 40,000
Jun 7: Paid Bennett Company the principal and interest due on the April 8 note payable.
Dr Notes payable 5,000
Dr Interest expense 50
Cr Cash 5,050
Jul. 6: Purchased $12,000 of merchandise from Bolton Company; signed a 90-day note with ten percent interest.
Dr Merchandise inventory 12,000
Cr Notes payable 12,000
Jul. 14: Paid the May 15 note due Lincoln Bank.
Dr Notes payable 40,000
Dr Interest expense 600
Cr Cash 40,600
Oct.2: Borrowed $30,000 from Lincoln Bank, signing a 120-day note at 12 percent.
Dr Cash 30,000
Cr Notes payable 30,000
December 31, adjusting entry
Dr Interest expense 600
Cr Interest payable 600
Oct. 4: Defaulted the note payable to Bolton Company.
No journal entry required
