Benoit Inc. issued 25-year, 9% mortgage bonds in the principal amount of $3 million on January 2, 1997, at a discount of $150,000. It then amortized the discount through 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 redemption 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, 2011, the company issued 20-year, 11% debenture bonds in the principal amount of $4 million at 102 and the proceeds were used to redeem the 25-year, 9% mortgage bonds on January 2, 2012. The indenture securing the new issue did not provide for any sinking fund or for retirement before maturity.
(a) Prepare journal entries to record the issuance of the 11% bonds and the retirement of the 9% bonds.
(b) Indicate the income statement treatment of the gain or loss from retirement and the note disclosure that is required. Assume that 2012 income from operations is $3.2 million and that the weighted number of shares outstanding is 1.5 million and the income tax rate is 40%.