Luke Corp. issued $2,000,000 of 20-year, 9% callable bonds on July 1, Year 1, with interest payable on June 30 and December 31. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions: Year 1 July 1 Issued the bonds for cash at their face amount. Dec. 31 Paid the interest on the bonds. Year 5 Dec. 31 Called the bond issue at 97, the rate provided in the bond indenture. (Omit entry for payment of interest.)

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Business

Marie English

2 May, 16:27

Luke Corp. issued $2,000,000 of 20-year, 9% callable bonds on July 1, Year 1, with interest payable on June 30 and December 31. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions: Year 1 July 1 Issued the bonds for cash at their face amount. Dec. 31 Paid the interest on the bonds. Year 5 Dec. 31 Called the bond issue at 97, the rate provided in the bond indenture. (Omit entry for payment of interest.)

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Hebert · Answer 1

Cash 2,000,000

Bonds Payable2,000,000

To record Issuance of bonds

Interest expense 90,000

Cash 90,000

To record payment of bonds

Bonds Payable 2,000,000

Cash 1,940,000

Gain on Redemption 60,000

To record the call of the bonds at 97

Explanation:

The bonds were issued at par, we have no information to oppose that.

The interst will be 2,000,000 x 9% x 1/2 = 90,000

Notice there is 2 payment per year, so the interest are split in two

Bonds called at 97:

2,000,000 x. 97 = 1,940,000

Book value ofthe bonds 2,000,000

gain on redemption 60,000

We pay obligation valued at 2,000,000 for 1,940,000 That's why we recognize a gain, we paid the debt cheaper.