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Issuance and Retirement of Bonds: Income Statement Presentation

Chris Mills Company issued its 9%, 25 year mortgage bonds in the principal amount of $5,000,000 on January 2, 1993,
at a discount of $250,000, which it proceeded to amortize by charges to expense over the life of the issue on a
straight-line basis. The indenture securing the issue provided that the bonds could be called for redeption in total but not in
part at any time before maturity at 104% of the principal amount, but it did not provide for any sinking fund.

On December 18, 2007, the company issued its 11%, 20 year debenture bonds in the principal amount of $6,000,000 at 102,
and the proceeds were used to redeem the 9%, 25 year mortgage bonds on January 2, 2008. The indenture securing the new issue
did not provide for any sinking fund or for retirement before maturity.

Instructions:

a) Prepare journal entries to record the issuance of the 11% bonds and the retirement of the 9% bonds.
b) Indicate the income statement treatment of the gain or loss from retirement and the note disclosure required.

Solution Preview

Instructions A
Issuance
DR: Cash (6,000,000 x 102%) 6,120,000
CR: Bonds payable 6,000,000
CR: Bond ...

Solution Summary

The solution examines issuance and retirement of bonds. Income statement presentation are analyzed. Journal entries are prepared.

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