Problem 10-28A: Recording Transactions for Callable Bonds

Arnold Corp. issued $600,000 of 20-year, 8 percent callable bonds on January 1, Year 1, with interest payable annually on December 31. The bonds were issued at their face amount. The bonds are callable at 104. The fiscal year of the corporation ends December 31.

Required

a. Show the effect of the following events on the financial statements by recording the appropriate amounts in a horizontal statements model like the following one. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). Use NA if an element was not affected by the event.

1. Issued the bonds on January 1, Year 1.
2. Paid interest due to bondholders on December 31, Year 1.
3. On January 1, Year 6, Arnold Corp. called the bonds. Assume that all interim entries were correctly recorded.

b. Prepare journal entries for the three events listed in Requirement a.