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8 July, 19:53

Lundholm, Inc., reports financial statements each December 31 and issues $600,000, 7%, 15-year bonds dated May 1, 2012, with interest payments on October 31 and April 30. Assuming the bonds are sold at par on May 1, 2012, complete the financial statement effects template to reflect the following events: (a) bond issuance, (b) the first semiannual interest payment, and (c) retirement of $200,000 of the bonds at 101 on November 1, 2012. Use negative signs with your answers, when appropriate.

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  1. 8 July, 22:31
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    bond issuance:

    Dr cash $600,000

    Cr bonds payable $600,000

    first semiannual interest payment:

    Dr interest expense $21000

    Cr cash $21000

    Retirement of $200,00:

    Dr bonds payable ($200,000/$600,000*$200,000) $200,000

    Dr loss on bond retirement $2000

    cr cash ($200,000*101%) $202,000

    Explanation:

    The issuance of the bond at par means that the cash realized is exactly the face value of $600,000, hence cash is debited with $600,000 while bonds payable is credited with $600,000.

    Bal b/f interest expense coupon interest bal c/f

    $600,000 $21000 $21000 $600,000

    A bond issued at par implies that coupon rate equals yield to maturity, hence interest expense is the same as the coupon payment as shown below:

    interest expense=coupon interest=$600,000*7%*6/12=$21000

    Bal c/f=bal b/f+interest-coupon interest
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