Question - Additional Hand-in Problem- Arrow Space
It is now January 1, 2013, and Arrow Space Limited is considering a $10 million share issue. The company would like to improve its debt / equity ratio before proceeding with the issue. The Company's 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 97.
The bonds were originally sold for 106.795 when the yield was 8%, and pay interest semi-annually on June 30 and December 31. The bonds will mature on December 31, 2013. Cartoons Limited's accounting policy is to amortize any bond premium or discount using the effective interest method.
Required: Prepare the journal entry to record the retirement of the bond issue on January 1, 2013.