On May 1, 2012, Chance Corp. issued $600,000, 9%, 5-year bonds at face value. Th

Question

On May 1, 2012, Chance Corp. issued $600,000, 9%, 5-year bonds at face value. The bonds were dated May 1, 2012, and pay interest semiannually on May 1 and November 1. Financial statements are prepared annually on December 31. D. Prepare the journal entry to record payment of interest on May 1, 2013, assuming no accrual of interest from January 1, 2013, to May 1, 2013. E. Prepare the journal entry to record payment of interest on November 1, 2013. F. Assume that on November 1, 2013, Chance calls the bonds at 102. Record the redemption of bonds.

Explanation / Answer

Newby Corp is paying off the bonds early, and paying the bondholders 102% of the face value of the bonds. Two entries are required on November 1, 2012: 1. Record the interest payment if it has not already been recorded: Debit Interest Expense $27,000 [$600,000 x 9% x 6/12] Credit Cash $27,000 2. Record the redemption of the bonds: Debit Bonds Payable $600,000 Loss on Early Retirement of Debt $12,000 Credit Cash $612,000 [$600,000 x 102%]

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