Headlands Limited issued 10-year, 7% debentures with a face value of $2.14 million on January 1, 2010. The proceeds received were $1.80 million. The discount was amortized on the straight-line basis over the 10-year term. The terms of the debenture stated that the debentures could be redeemed in full at any point before the maturity date, at a price of 105 of the principal. There was no requirement for a sinking fund.
On January 1, 2017, Headlands issued a mortgage at 101 with a principal of $3.2 million secured by land and building. The mortgage had a 25-year amortization period, with interest payable at 8%. Upon issuance of the mortgage, Headlands used the proceeds to redeem the 7% debentures. Headlands prepares financial statements in accordance with ASPE.
Prepare the journal entry to record the issuance of the 8% mortgage January 1, 2017.
Prepare the journal entry to record the retirement of the 7% debentures on January 1, 2017
Indicate the income statement treatment of the gain or loss on redemption of debentures. Assume that 2017 income before taxes and before any gain or loss on redemption of debentures is $1.80 million, the income tax rate is 19%, and the weighted average number of common shares outstanding is 1.30 million.