On March 1, 2015, Elden Distributors Ltd., a privately held company, sold $5,000,000 of 10-year, 6% callable bonds to finance its expansion of operations. The bonds, which pay interest on July 1 and January 1, were issued at an effective interest rate of 5%, resulting in Elden Distributors Ltd. receiving cash of $5,389,724 plus accrued interest. The bond premium is amortized using the straight-line method of amortization. The fiscal year-end of the company is July 31. On January 1, 2020, the bonds were called at 102, the rate provided in the bond indenture.
Instructions
1. Journalize the entry to record the amount of cash proceeds from the sale of the bonds.
2. Journalize the entries to record the following:
a. The first semiannual interest payment on July 1, 2015, and the amortization of the bond premium, using the straight-line method.
b. The adjusting entry for interest expense at the July 31, 2015, year-end.
c. The interest payment on January 1, 2016, and the amortization of the bond premium, using the straight-line method.
d. The retirement of the bonds on January 1, 2020. (Omit entry for payment of interest.)
3. Identify possible reasons for Elden Distributors Ltd.'s decision to call the bonds.