Three years ago American Insulation Corporation issued 10 percent, $1,000,000, 1

Question

Three years ago American Insulation Corporation issued 10 percent, $1,000,000, 12-year bonds for $870,000. Debt issue costs were $5,000. American Insulation exercised its call privilege and retired the bonds for $940,000. The corporation uses the straight-line method both to determine interest and to amortize debt issue costs.

Prepare the journal entry to record the call of the bonds.

Three years ago American Insulation Corporation issued 10 percent, $1,000,000, 12-year bonds for $870,000. Debt issue costs were $5,000. American Insulation exercised its call privilege and retired the bonds for $940,000. The corporation uses the straight-line method both to determine interest and to amortize debt issue costs.

Prepare the journal entry to record the call of the bonds.

Explanation / Answer

Answer:-

Three years ago American Insulation Corporation issued 10 percent, $1,000,000, 12-year bonds for $870,000

So Discount on Issue of Bond = 1000000 - 870000 = $130,000

to be Amortized over 12 Years

therefore unamortized balance = 130,000 * 9/12 = $ 97,500

2. issued bond at Debt Issue cost of $ 5,000

To be amortized over 12 Years

So Unamortized balance = 5000 * 9/12 = $ 3,750

3. Journal Entry For early Retirment of Callable Bonds

Bond Paybale Account Debit   $ 1000,000
Loss on Retirment of Bond Account Debit $ 41,250

Cash Account Credit $ 940,000
Debt Issue Cost Credit $ 3,750
Discount on Issue of Bond Credit $ 97,500

( being Callable bonds retired early, and unamortised balance of Debt issue cost and Discount on Bond Issue Reverted Accordingly.)   

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