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Question 3 It is now January 1, 2018, and Cartoons Limited is considering a $10 million share issue. The company would like to improve its

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Question 3 It is now January 1, 2018, and Cartoons Limited is considering a $10 million share issue. The company would like to improve its debt/equity ratio before proceeding with the issue. Cartoons' Chief Financial Officer has suggested to the board of directors that the company could retire its $5 million of 9%, 10-year bonds. Currently, interest rates have risen, and therefore the bonds could be retired at 99. The bonds were issued when the yield was 8%, and pay interest semi-annually on June 30 and December 31. Cartoons Limited's accounting policy is to amortize any bond premium or discount using the effective interest method. The carrying value of the bonds on July 1, 2017 was $5,047,152. The board of directors would like to know what the journal entry would be if the bonds were retired immediately on January 1, 2018. [HINT: Before you record the retirement, what do you need to record on December 31, 2016?]

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