Cupola fan corporation issued 10%, $400,000, 10-year bonds for $385,000 on june 30, 2016. debt issue costs were $1,500. interest is paid semiannually on december 31 and june 30. one year from the issue date (july 1, 2017), the corporation exercised its call privilege and retired the bonds for $395,000. the corporation uses the straight-line method both to determine interest expense and to amortize debt issue costs. required: 1. to 4. prepare the necessary journal entries. (if no entry is required for a transaction/event, select "no journal entry required" in the first account field.)

Given:
issued 10%, $400,000, 10-year bonds for $385,000 on June 30, 2016
debt issue costs were $1,500.
interest is paid semiannually on December 31 and June 30
one year from the issue date (july 1, 2017), the corporation exercised its call privilege and retired the bonds for $395,000
the corporation uses the straight-line method both to determine interest expense and to amortize debt issue costs.

Journal entries:
                                                                                       Debit            Credit
June 30, 2016         Cash                                              383,500
                                             Bonds payable                                      383,500
Dec. 31, 2016          Interest expense                             20,825
                                             Bonds payable                                             825
                                             Cash                                                       20,000
June 30, 2017         Interest expense                              20,825
                                             Bonds payable                                             825
                                             Cash                                                        20,000
June 30, 2017         Bonds payable                               385,150
                                Loss on early extinguishment            9,850
                                             Cash                                                      395,000

*
Interest is computed by: 400,000 * 10% = 40,000 per annum
40,000 / 2 = 20,000 per semi-annual. Every Dec. 31 and June 30

400,000 - 385,000 = 15,000 discount
15,000 discount + 1,500 debt issue cost = 16,500
16,500 * 10% = 1,650 amortization per annum
1,650 / 2 = 825 amortization per semi-annual

Bonds payable total = 383,500 + 825 + 825 = 385,150
Loss on early extinguishment = 395,000 - 385,150 = 9,850 

Iwould say the answer is 4.

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