Question

Candy Corporation has $100,000 of 8% bonds that were issued in year 1 at par. When the bonds are repaid at the maturity date, the journal entry will require the following:

Answer 1

When Candy Corporation repays its $100,000 8% bonds at maturity, the journal entry will debit the Bonds Payable account and credit Cash for $100,000, as the bonds are repaid at par value.

Step-by-step explanation:

The subject in question pertains to accounting for the retirement of bonds. When Candy Corporation repays its $100,000 of 8% bonds at maturity, the journal entry will consist of a debit to the Bonds Payable account and a credit to the Cash account for the face value of the bonds. No gain or loss is recorded since the bonds are repaid at par value. The entry would look like this:

Dr Bonds Payable $100,000
Cr Cash $100,000

The aforementioned scenario assumes that the bond carries no risk, sells at par, and interest rates in the economy have not changed since the issuance of the bond. However, if interest rates have increased to 12%, the market value of the bond would have decreased had it been traded before maturity. Investors would prefer new bonds yielding 12% returns over existing 8% bonds unless they could purchase the 8% bonds for less than face value. This demonstrates the inverse relationship between interest rates and bond prices. Nonetheless, this does not affect the accounting for the retirement of the bonds at maturity.