Question

Several years ago, Walters Company issued bonds with a face value of $1,000,000 at par. As a result of declining interest rates, the company has decided to call the bond at a call premium of 5 percent over par. Record the retirement of the bonds. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Walters Company will retire its bonds by paying 105% of the face value due to a call premium of 5%, which results in a payment of $1,050,000. The journal entry includes debiting Bonds Payable and Bond Redemption Premium, and crediting Cash for the total amount paid.

Step-by-step explanation:

When Walters Company issued the bonds at par with a face value of $1,000,000, they were sold at their face value. Years later, due to falling interest rates, the company has decided to retire its bonds early.

Since the call premium is 5 percent over par, the company will pay the bondholders 105% of the face value or $1,050,000 (which is $1,000,000 + 5% of $1,000,000).

The journal entry to record this retirement of bonds would be:

• Debit Bonds Payable for the face value: $1,000,000
• Debit Bond Redemption Premium for the call premium: $50,000
• Credit Cash for the total amount paid to bondholders: $1,050,000

This entry removes the liability from the balance sheet and recognizes the expense of the call premium.

Answer 2

Walter company Journal $

Date

Bond investment Dr 1,000,000

Bond premium Dr 50,000

Bank Cr. 1,050,000

Narration. Bond retirement at a premium of 5% over par.

Step-by-step explanation:

The bond investment account is kept fixed at the amount at which it was subscribe, the corresponding interest are debited to income statement on payment to the bond holders.

In the same vein the retirement of the bond at a premium represents an expenses to the firm which has to be debited to the income statement on payment to the bond holders.