Hohl Company is planning to expand its facilities by constructing a new building, and installing new machines. In order to complete this project, the company has decided to issue $2,000,000 worth of 20-year 4% callable bonds.
On April 1, the company completed all the necessary paperwork, and is now ready to issue the bonds. Fortunately, just as Hohl Company was issuing its bonds, the current market rate dropped to 3.5%. Their financial advisor recommended issuing the bonds at a premium of $142,124.
On March 31 of year 10, interest rates dropped to 2%. At this point, the company issues $2,200,000 of 10-year 2% bonds at par to redeem all outstanding 3.5% bonds.
- Record the journal entry for the issuance of bonds on April 1, year 1.
- Record the journal entry to record payment of interest on October 1.
- Record any required journal entries as of the company year-end, February 28, year (Note that the company pays interest bi-annually.)
- Record journal entries for retirement of the 3.5% bonds and issue of new 2% bonds.
- Record the first interest payment on the 2% bonds.