Question

On July 1, Aloha Co. exercises a call option that requires Aloha to pay $408,000 for its outstanding bonds that have a carrying value of $412,000 and par value of $400,000. The company exercises the call option after the semiannual interest is paid the day before on June 30.

Answer 1

Answer:

The journal entry for the following is:

Explanation:

Note: Requirement is record the retirement of bonds maturity.

Bonds Payable A/c.............................Dr     $400,000

Premium on bonds payable A/c......Dr     $12,000

      Cash A/c..................................................Cr   $408,000

       Gain on retirement of bonds A/c.......Cr  $4,000

Working Note:

Given,

Book value of bonds retirement day is $412,000

Face value of bond is $400,000

Call Price of the bonds is $408,000

Premium on bonds payable = Book value - Face value

= $412,000 - $400,000

= $12,000

Gain on redemption of bonds = Book value - Call Price

= $412,000 - $408,000

= $4,000

Answer 2

A semiannual payment is one that is paid, published, or reported otherwise occurs twice a year, often once every 6 months. The journal entries are shown in the image attached below, kindly go through it for better understanding.

Working Notes:

$\text{Book value of bonds retirement day = 412,000}\\\text{Face value of bond = 400,000}$

$\text{Book value of bonds retirement day = 412,000\\\\The face value of a bond = 400,000\\The call Price of the bonds = 408,000\\Premium on bonds payable = Book value - Face value\\\\= 412,000 - 400,000\\= 12,000\\Gain on redemption of bonds = Book value - Call Price\\= 412,000 - 408,000\\= 4,000}$

For more information related to the semi-annual interest payment computation, refer to the link:

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