Exhibit 14-7 On January 1, 2010, Bubbles, Inc.sold $200, 000 of its 12% five-year bonds to yield 10%.Interest is paid each January 1 and July 1, and effective interest amortization is used.On May 1, 2012, Bubbles, retired $100, 000 of the bonds at 104.The book value of the bonds on December 31, 2011, was $212, 926.
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Refer to Exhibit 14-7.The entry to record the retirement would include a

Question

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The entry to record the retirement of bonds includes a debit to Bonds Payable for the par value of the bonds being retired, which is $100,000. Since the bonds were retired at a premium of 4%, Bubbles must also credit the Premium on Bonds Payable account for the amount of the premium amortized from January 1, 2012, to May 1, 2012, which is $4,000 ([$200,000 x 12% x 4/12]/2). The book value of the bonds on May 1, 2012, is $212,926 ($212,926 – $100,000 + $12,000). Bubbles received $104 for every $100 of bonds retired. Therefore, Bubbles received $104,000 ($100,000 x 104%) in exchange for retiring $100,000 in bonds, which means that the company received $4,000 ($104,000 – $100,000) more than the book value. The company must credit the Premium on Bonds Payable account for the difference between the cash received and the book value of the bonds retired, which is $12,024 ($8,024 + $4,000). Finally, Bubbles must debit Cash for the amount of cash received in exchange for the bonds, which is $104,000.

Exhibit 14-7 on January 1, 2010, Bubbles, Inc