Cupola Fan Corporation issued 8%, $470,000, 10-year bonds for $459,000 on June 30, 2018. Debt issue costs were $2,200. Interest is paid semiannually on December 31 and June 30. One year from the issue date (July 1, 2019), the corporation exercised its call privilege and retired the bonds for $465,000. The corporation uses the straight-line method both to determine interest expense and to amortize debt issue costs. Required: 1. to 4. Prepare the journal entry to record the issuance of the bonds, the payment of interest and amortization of debt issue costs on December 31, 2018 & 2019, and the call of the bonds. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer and Explanation:

The Journal entries are shown below:-

1. Cash  Dr, $456,800

Debt issue costs  Dr, $2,200

Discount on bonds payable  Dr, $11,000

To Bonds payable      $470,000

(Being 8% bonds issued  is recorded)

2. Interest expense Dr, $19,350   ($18,800 + $550)

     To Discount on bonds payable $550   ($11,000 ÷ 20)

    To Cash $18,800   ($470,000 × 8%) × 6 ÷ 12

(Being interest expense on bonds  is recorded)

Debt issue expenses Dr, $110 ($2,200 ÷ 20)

        To Debt issue costs  $110

(Being debt issue expenses is recorded)

3. Interest expense   Dr, $19,350

       To Discount on bonds payable $550 ($11,000 ÷ 20)

       To Cash $18,800 ($470,000 × 8%) × 6 ÷ 12

(Being interest expense on bonds   is recorded)

Debt issue expenses $110 ($2,200 ÷ 20)

      To Debt issue costs   $110

(Being debt issue expenses  is recorded)

4. 8% Bonds payable  Dr, $470,000

Loss on early extinguishment of debt  Dr, $6,880

     To Discount on bonds payable $9,900 ($11,000 - 550 - 550)  

    To Debt issue costs Cash $1,980 ($2,200 - 110 - 110)

    To Cash   $465,000

(Being bonds extinguished  is recorded)

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