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2 June, 10:03

On July 1, Aloha Co. exercises a call option that requires Aloha to pay $408,000 for its outstanding bonds that have a carrying value of $412,000 and par value of $400,000. The company exercises the call option after the semiannual interest is paid the day before on June 30.

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  1. 2 June, 12:42
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    The journal entry for the following is:

    Explanation:

    Note: Requirement is record the retirement of bonds maturity.

    Bonds Payable A/c ... Dr $400,000

    Premium on bonds payable A/c ... Dr $12,000

    Cash A/c ... Cr $408,000

    Gain on retirement of bonds A/c ... Cr $4,000

    Working Note:

    Given,

    Book value of bonds retirement day is $412,000

    Face value of bond is $400,000

    Call Price of the bonds is $408,000

    Premium on bonds payable = Book value - Face value

    = $412,000 - $400,000

    = $12,000

    Gain on redemption of bonds = Book value - Call Price

    = $412,000 - $408,000

    = $4,000
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