Assignment task:
Accounting for bond issuance and gain on retirement
Twilight Corp. wanted to raise cash to fund its expansion by issuing long-term bonds. The corporation hired an investment banker to manage the issue (best efforts underwriting) and also hired the services of a lawyer and an audit firm. On June 1, 2023, Twilight sold $500,000 in long-term bonds. The bonds will mature in 10 years and have a stated interest rate of 10%. Other bonds that Twilight has issued with identical terms are traded based on a market rate of 8%. The bonds pay interest semi-annually on May 31 and November 30. The bonds are to be accounted for using the effective interest method. On June 1, 2025, Twilight decided to retire 20% of the bonds. At that time the bonds were selling at 102.
Instructions (Round all values to the nearest dollar)
a) Prepare the journal entry for the issuance of the bonds on June 1, 2023.
b) What was the interest expense related to these bonds that would be reported on Twilight's calendar 2023 income statement?
c) Prepare all entries from after the issue of the bond until December 31, 2023.
d) Calculate the gain or loss on the partial retirement of the bonds on June 1, 2025.
e) Prepare the journal entry to record the partial retirement on June 1, 2025.