Pasquali Ltd. issues $600,000 of 9% bonds on 1 July 20X1. Additional information on the bond issue is as follows:

Required:
1. Record the bond issue and the first interest payment under the effective interest method.
2. On 1 August 20X6, the company defeased 30% of the bonds for the market price of 103 plus accrued interest. Record the entries necessary to update the portion of the bond issue defeased (interest from 30 June 20X6) and to record the defeasance.
3. What critical element of a defeasance allows it to be recorded with derecognition of the bond? Contrast this to in-substance defeasance.
4. Have interest rates risen or fallen between the issuance of the bonds and the defeasance? (Assume no significant change in the company’s risk.)
5. Discuss the nature of the gain or loss recorded in (2).
6. Record the entry to accrue interest expense on 31 December 20X6, on the remaining bonds.

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Bond date Maturity date Yield rate Interest payment dates 1 January 20X1 1 January 20X11 12% 30 June, 31 December