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Cupola Fan Corporation issued 10%, $400,000, 10-year bonds for $385,000 on June 30, 2018. Debt issue costs were $1,500. Interest is paid semiannually on December 31 and June 30. One year from the issue date (July 1, 2019), 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, 2018.3. Prepare the journal entries to record the payment of interest and amortization of debt issue costs on June 30, 2019.4. Prepare the journal entry to record the call of the bonds.

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Answer:

1. June 30,2018

Dr Cash $383,500

Cr Bonds Payable $383,500

2. December 31,2018

Dr Interest Expense $20,825

Cr Bonds Payable $825

Cr Cash $20,000

3. June 30,2019

Dr Interest Expense $20,825

Cr Bonds Payable $825

Cr Cash $20,000

4. July 1,2019

Dr Bonds Payable $385,150

Dr Loss on retirement of Bonds $9,850

Cr Cash $395,000

Explanation:

1. Preparation of the journal entry to record the issuance of the bonds

For the Year 2018 & 2019

June 30,2018

Dr Cash $383,500

Cr Bonds Payable $383,500

($385,000-$1,500)

(Being To Record the issuance of Bonds)

2. Preparation of the journal entries to record the payment of interest and amortization of debt issue costs on December 31, 2018

December 31,2018

Dr Interest Expense $20,825

Cr Bonds Payable $825

Cr Cash $20,000

($400,000×10/100×6/12)

(Being To Record the Interest Expense)

3. Preparation of the journal entries to record the payment of interest and amortization of debt issue costs on June 30, 2019

June 30,2019

Dr Interest Expense $20,825

Cr Bonds Payable $825

Cr Cash $20,000

($400,000×10/100×6/12)

(Being To Record the Interest Expense)

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

July 1,2019

Dr Bonds Payable $385,150

($383,500+$825+$825)

Dr Loss on retirement of Bonds $9,850

[$395,000-($383,500+$825+$825)]

Cr Cash $395,000

(Being To Record the early retirement of Bonds)

Calculations for the Amortization of Debt cost

First step is to calculate the Total cost incurred on issuance of Bonds Payable

Total cost incurred on issuance of Bonds Payable=($15,000+$1,500)

Total cost incurred on issuance of Bonds Payable=$16,500

Second step is to calculate The cost amortize annually

Cost amortize annually=($16,500×10/100)

Cost amortize annually=$1,650

Third step is to calculate the Amortization cost on December 31,2018 & June 30,2019

Amortization Cost for 6 months=($1,650×6/12)

Amortization Cost for 6 months=$825

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