Question

The early retirement of a bond includes ______.

a) elimination of the liability
b) increase in the liability
c) recording of a gain or loss
d) receipt of cash by the the company that issued the bonds
e) payment of cash

Answer 1

Early retirement of a bond involves eliminating the liability on the company's balance sheet, potentially recording a gain or loss, and paying cash to bondholders, not receiving it.

Step-by-step explanation:

The early retirement of a bond includes elimination of the liability, recording of a gain or loss, and payment of cash. Once a firm decides to retire its bond early, it will pay back the principal to the bondholders before the predetermined maturity date. Often this is done when a company can borrow at a lower interest rate or has enough cash to pay off the debt. This transaction eliminates the liability as the company no longer owes the bondholders, and it may result in a gain or loss depending on whether the bond is retired for more or less than its carrying amount. The company will not receive cash in this process; rather, it pays out cash to bondholders to redeem the bonds.