Gester Corporation retires its $100,000 face value bonds at 105 on January 1, fo

Question

Gester Corporation retires its $100,000 face value bonds at 105 on January 1, following the payment of semiannual interest. The carrying value of the bonds at the redemption date is $103,745. The entry to record the redemption will include a

credit of $1,255 to Gain on Bond Redemption.

Andrews Inc. issues a $497,000, 10% 3-year mortgage note on January 1. The note will be paid in three annual installments of $200,000, each payable at the end of the year. What is the amount of interest expense that should be recognized by Andrews Inc. in the second year?

If a corporation issued $2,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?

Explanation / Answer

1

Correct option is:

Debit of $3,745 to premium on bonds payable

Explanation:

When a bond is redeem on premium, we consider the book value , face value, cash paid.

bond payable is debited with face value and cash is credited with amount paid in redemption. All the unamortised premium is debited in premium on bonds payable. Unamortised premium is the difference between face value and book value . Here the difference is :

Unamortised premium=book value -face value

=$103,745-$100,000

=$3.745

So this $3,745 of unamortised premium is debited in premium on bonds payable.

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