Problem: Chris Mills Company issued its 9%, 25 year mortgage bonds in the principal amount of $5,000,000 on January 2, 1993, at a discount of $250,000, which it proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The indenture securing the issue provided that the bonds could be called for redeption in total but not in part at any time before maturity at 104% of the principal amount, but it did not provide for any sinking fund.
On December 18, 2007, the company issued its 11%, 20 year debenture bonds in the principal amount of $6,000,000 at 102, and the proceeds were used to redeem the 9%, 25 year mortgage bonds on January 2, 2008. The indenture securing the new issue did not provide for any sinking fund or for retirement before maturity.
Instructions:
1) Prepare journal entries to record the issuance of the 11% bonds and the retirement of the 9% bonds.
2) Indicate the income statement treatment of the gain or loss from retirement and the note disclosure required.