Headland, Inc. had outstanding $6,510,000 of 10% bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued $8,620,000 of 9%, 15-year bonds (interest payable July 1 and January 1) at 98. A portion of the proceeds was used to call the 10% bonds (with unamortized discount of $260,400) at 104 on August 1. Unamortized bond discount and issue cost applicable to the 12% bonds were $121,000 and $39,400, respectively.

Required:

Prepare the journal entries necessary to record the issue of the new bonds and the refunding of the bonds.

Answer and Explanation:

The Journal entry is shown below:-

Cash Dr, $8,447,600 ($8,620,000 * 98 : 100)

Discount on issue of bonds Dr, $172,400

To Bonds payable $8,620,000

(Being issue of binds is recorded)

Here we debited the cash as it increased the assets and discount on issue of bonds as it increased the discount and we credited the bonds payable as it increased the liabilities

2. Bonds payable Dr, $6,510,000

Loss on redemption of bonds Dr, $36,400

To Cash $6,396,000 ($6,510,000 * 104 : 100)

To Discount bonds payable $121,000

To Unamortized bond issue cost $29,400

(Being refunding of the bonds is recorded)

Here we debited the bonds payable and loss on redemption of bonds as it decreased the liabilities and increased the losses and we credited the cash, discount bonds payable as it reduced the assets, reduced the discount and credited the Unamortized bond issue cost