Question

On 08-01-15, O issued $2,000,000 of its 6%, 10-year callable term bonds dated 08-01-15. The bonds pay interest every February 01 and August 01. O can call in the bonds any time after 08-01-20 at 101. At the time O issued the bonds, similar bonds paid 6%. Upon issuing the bonds, O incurred and paid $112,000 of bond issuance costs. O uses the effective-interest method to amortize any bond discount or premium. O prepares AJEs only as of every December 31. On October 01, 2020, G called in $1,000,000 of the bonds at the call price of 101 plus interest. Prepare the entries O should make on:

a. 08-01-15

b. 12-31-15

c. 02-01-16

d. 08-01-16

e. 12-31-17

f. 02-01-18

g. 10-01-20

h. 12-31-20

i. 02-01-21

Answer 1

Journal entries in the books of O Limited
Date	Particulars	Debit ($)	Credit ($)
2015
01-Aug	Bank	1888000
	Discount on issue of bond	112000
	6% Callable bond		2000000
	(Being 6% callable bond issued)
31-Dec	Interest on bond	50000
	Interest payable		50000
	(Being interest due on callable bond recorded)
31-Dec	Profit and loss account	50000
	Interest on bond		50000
	(Being interest expenses adjusted against the profit and loss account)
31-Dec	Profit and loss account	11200
	Discount on issue of bond		11200
	(Being interest expenses adjusted against the profit and loss account)
2016
01-Feb	Interest payable	50000
	Interest on bond	10000
	Bank		60000
	(Being half-yearly interest paid)
	Profit and loss account	10000
	Interest on bond		10000
	(Being interest expenses adjusted against the profit and loss account)
01-Aug	Interest on bond	60000
	Bank		60000
	(Being half-yearly interest paid)
	Profit and loss account	60000
	Interest on bond		60000
	(Being interest expenses adjusted against the profit and loss account)
2017
31-Dec	Interest on bond	50000
	Interest payable		50000
	(Being interest due on callable bond recorded)
31-Dec	Profit and loss account	50000
	Interest on bond		50000
	(Being interest expenses adjusted against the profit and loss account)
31-Dec	Profit and loss account	11200
	Discount on issue of bond		11200
	(Being discount of issue amortized against the profit and loss account)
2018
01-Feb	Interest payable	50000
	Interest on bond	10000
	Bank		60000
	(Being half-yearly interest paid)
	Profit and loss account	10000
	Interest on bond		10000
	(Being interest expenses adjusted against the profit and loss account)
2020
01-Oct	6% Bond	1000000
	Premium of repayment	10000
	Interest	10000
	Bank		1020000
	(Being bond with face value of $1000000 repaid)
	Profit and loss account	10000
	Interest on bond		10000
	(Being interest expenses adjusted against the profit and loss account)
01-Oct	Profit and loss account	28000
	Discount on issue of bond		28000
	(Being discount of issue amortized against the profit and loss account)
31-Dec	Interest on bond	30000
	Interest payable		30000
	(Being interest due on callable bond recorded)
31-Dec	Profit and loss account	30000
	Interest on bond		30000
	(Being interest expenses adjusted against the profit and loss account)
31-Dec	Profit and loss account	11200
	Discount on issue of bond		11200
	(Being discount of issue amortized against the profit and loss account)
2021
01-Feb	Interest payable	30000
	Interest on bond	5000
	Bank		35000
	(Being half-yearly interest paid)
	Profit and loss account	5000
	Interest on bond		5000
	(Being interest expenses adjusted against the profit and loss account)