Metlock Company issued its 8%, 25-year mortgage bonds in the principal amount of $3,040,000 on January 2, 2006, at a discount of
$152,000, 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 redemption in total but not in part at any time before maturity at 105%
of the principal amount, but it did not provide for any sinking fund.
On December 18, 2020, the company issued its 10%, 20-year debenture bonds in the principal amount of $4,150,000 at 102, and the
proceeds were used to redeem the 8%, 25-year mortgage bonds on January 2, 2021. The indenture securing the new issue did not
provide for any sinking fund or for redemption before maturity.
(a) Prepare journal entries to record the issuance of (1) the 10% bonds and (2) the redemption of the 8% bonds. (If no entry is required,
select "No Entry" for the account titles and enter O for the amounts. Credit account titles are automatically indented when amount is entered.
Do not indent manually.)
No. Date Account Titles and Explanation Debit Credit
(1) December 18, 2020 Cash 4233000
Bonds Payable 4150000
Premium on Bonds Payable 83000
(2) January 2, 2021 Bonds Payable 3040000
Loss on Redemption of Bonds 152000
Discount on Bonds Payable 104000
Cash 3192000
(b) Indicate the income statement treatment of the gain or loss from redemption.
The loss is reported as Ordinary Loss
