The following section is taken from Budke Corp.’s balance sheet at December 31,
ID: 2385683 • Letter: T
Question
The following section is taken from Budke Corp.’s balance sheet at December 31, 2010.Current liabilities
Bond interest payable $ 72,000
Long-term liabilities
Bonds payable, 9%, due January 1, 2015 $ 1,600,000
Interest is payable semiannually on January 1 and July 1.The bonds are callable on any
interest date.
Instructions:
(a) Journalize the payment of the bond interest on January 1, 2011.
(b) Assume that on January 1, 2011, after paying interest, Budke calls bonds having
a face value of $600,000.The call price is 104. Record the redemption of the bonds.
(c) Prepare the entry to record the payment of interest.
Explanation / Answer
Prepare the entry to record the payment of interest on July 1, 2010, assuming no previous accrual of interest on the remaining bonds. You had bonds payable of $1,600,000, but on January 1, 2010, you called bonds having a face value of $600,000, so now you're left with bonds having a face value of $1m, so interest for this period of 6 mths = $1,000,000 x 9% x 6/12 = $45,000 July 1 Bond interest expense $45,000 Cash $45,000