Assume that on January 1, 2019, after paying interest, Colaw Company calls bonds having a face value of $1,200,000. The call price is 101. Record the redemption of the bonds. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Journal entry

Explanation:

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The following is taken from the Colaw Company balance sheet. line premisam amortization, COLAW COMPANY Balance Sheet (partial) December 31, 2017 and redemption of bonds LO 5) Current liabilities Interest payable (for 12 months from January 1 to December 31) 210,000 Long-term liabilities Bonds payable, 7% due January 1, 2028 Add: Premium on bonds payable $3,000,000 200,000 3,200,000 682 15 Long-Term Liabilities Interest is payable annually on January 1. The bonds are callable on any annual interest date. Colaw uses straight-line amortization for any bond premium or discount. From December 31, 2017, the bonds will be outstanding for an additional 10 years (120 months).

The journal entry is as follows

Bond payable $1,200,000

Premium on bond payable $72,000

              To Cash $1,212,000     ($1,200,000 × 101%)

               To Gain on redemption of bonds $60,000

(Being the redemption of the bond is recorded)

The premium on bond payable is

= ($200,000 - $20,000) × $1,200,000 ÷ $3,000,000

= $72,000

The $20,000 is come from

= $200,000 ÷ 10 years

= $20,000

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reducing the scale of the market for a new product.