Purpose: This exercise will illustrate how to account for the redemption of bonds by cash payment prior to maturity.
The balance sheet for Waisman Corporation reports the following information on December 31, 2013:
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Long-term liabilities
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$ 1,000,000
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9% Bonds payable, due December 31, 2017
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60,000
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Less: Discount on bonds payable
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$ 940,000
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Interest is payable annually on December 31. The straight-line method of amortization is used. Interest rates have declined in the market place since the above mentioned bonds were issued. Waisman decides to borrow money from another source at a lower interest rate to lower its annual interest charges. Therefore, on July 1, 2014, Waisman redeems all of the old outstanding bonds at 102 (recall that bond prices vary inversely with changes in the market rate of interest).
Instructions
Prepare the journal entry(ies) to record the redemption of these bonds on July 1, 2014.