Problem 2-6
Requirement 1
2008
Jan. 1 Cash 4,200,000
Bonds payable 4,000,000
Premium on bonds payable 200,000
Dec. 31 Interest expense 480,000
Cash (4,000,000 x 12%) 480,000
31 Premium on bonds payable 40,000
Interest expense (200,000 / 5) 40,000
31 Bonds payable 1,000,000
Premium on bonds payable 40,000
Cash 950,000
Gain on early retirement of bonds 90,000
Face of bonds payable retired 1,000,000
Add: Applicable premium (1/4 x 160,000) 40,000
Book value 1,040,000
Less: Retirement price (1,000,000 x 95%) 950,000
Gain on retirement 90,000
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