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3 April, 22:04

Sunland Company issued its 9%, 25-year mortgage bonds in the principal amount of $2,990,000 on January 2, 2006, at a discount of $151,000, which it proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 106% of the principal amount, but it did not provide for any sinking fund.

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  1. 3 April, 23:53
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    Cash 2,839,000 debit

    discount on BP 151,000 debit

    Bonds Payabl*e 2,990,000 credit

    --to record bonds issuance--

    interest expense 275,140 debit

    discount on BP 6,040 credit

    cash 269,100 credit

    --to record interest payment--

    Explanation:

    We will cacualte the cash outlay per interest paymenr

    2,990,000 x 9% = 269,100 cash outlay

    Then, we divide the discount over the life of the bond to knwo the depreciation:

    amortization 151,000 / 25 = 6040

    interest expense: 269,100 + 6040 = 275,140

    As both, the amortization and cash putlay are fixed th interest entry repeats it selft each year.
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