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Hoffman Corporation retires its bonds at 106 on January 1, following the payment of semiannual interest. The face value of the bonds is $400,000. The carrying value of the bonds at the redemption date is $419,800. The entry to record the redemption will include aA. debit of $24,000 to Premium on Bonds Payable. B. credit of $4,200 to Gain on Bond Redemption. C. debit of $19,800 to Premium on Bonds Payable. D. credit of $19,800 to Loss on Bond Redemption.

User Erikka
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Final answer:

The Hoffman Corporation's bond redemption will result in a loss on bond redemption of $4,200. The correct entry includes debiting Premium on Bonds Payable for $19,800 and crediting Loss on Bond Redemption for the same amount.

Step-by-step explanation:

The Hoffman Corporation retired its bonds at 106% of the face value on January 1, which means the company paid 106% of the $400,000 face value to buy back the bonds. We are given that the carrying value of the bonds at the redemption date is $419,800. To record the redemption, we need to compare the redemption price with the carrying value.

The redemption price of the bonds is 106% of the face value, which is $424,000 (106% of $400,000). Since the carrying value is only $419,800, the company needs to recognize a loss on bond redemption, which is the difference between the redemption price and the carrying value. Thus, the loss is $4,200 ($424,000 redemption price - $419,800 carrying value).

The journal entry to record the redemption will include a debit to Bonds Payable for the face value of $400,000, a debit of $19,800 to Premium on Bonds Payable (the difference between the carrying value and the face value), a credit of $19,800 to Loss on Bond Redemption (the aforementioned difference between redemption price and carrying value), and a credit to Cash for the total redemption price of $424,000.

User Deadbyte
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