Question

Debt issue costs; issuance; expensing; early extinguishment; straight-line interest

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

2. Prepare the journal entries to record the payment of interest and amortization of debt issue costs on December 31, 2016.

3. Prepare the journal entries to record the payment of interest and amortization of debt issue costs on June 30, 2017.

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

Answer 1

Date	Accounts	Debit	Credit
June 30, 2016	Cash ($385,000 – $1,500)	$383,500
	Debt issue costs	$1,500
	Discount on bonds payable ($400,000 – $385,000)	$15,000
	Bonds payable		$400,000
Dec 31, 2016	Interest expense ($20,000 + $750)	$20,750
	Discount on bonds payable ($15,000 ÷ 20)		$750
	Cash (5% × $400,000)		$20,000
Dec 31, 2016	Debt issue expense	$75
	Debt issue costs ($1,500 ÷ 20)		$75
June 30, 2017	Interest expense ($20,000 + $750)	$20,750
	Discount on bonds payable ($15,000 ÷ 20)		$750
	Cash (5% × $400,000)		$20,000
June 30, 2017	Debt issue expense	$75
	Debt issue costs ($1,500 ÷ 20)		$75
July 01, 2017	Bonds payable	$400,000
	Loss on early extinguishment	$9,850
	Debt issue costs		$1,350
	Discount on bonds payable		$13,500
	Cash		$395,000