Three years ago American Insulation Corporation issued 10%, $830,000, 10-year bonds for $785,000. American Insulation exercised its call privilege and retired the bonds for $820,000. The corporation uses the straight-line method to determine interest. Prepare the journal entry to record the call of the bonds.

Explanation:

Subtract discount amount amortized for 3 years - 45,000/10 *3

So 45,000 - 14,500 = 31,500

Par value of the bonds                             $830,000                                                                                                                

Less: Discount on bonds payable            $31,500

Book value of the bonds on the date of call of the bonds                                                              $798,500

Less: Amount paid to reacquire the bonds$820,000

Loss on redemption of bonds ($21,500)

Based on the calculations, now we can journalize the entries:

Dr Bonds Payable 830,000

Dr Loss early extinguishment 21,500

    Cr Discount on Bonds Payable      31,500

    Cr Cash                                             820,000

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