Question

A company retired $60 million of its 6% bonds at 102 ($61.2 million) before their scheduled maturity. At the time, the bonds had a remaining discount of $2 million. Prepare the journal entry to record the redemption of the bonds. (Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5). If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Bonds Payable $60 million Dr

Loss on retirement of bond $3.2 million Dr

Cash $61.2 million Cr

Discount on Bonds Payable $2 million Cr

Step-by-step explanation:

Bonds are issued either at a premium or a discount based on the interest rate they are paying as compared to the market or similar bonds' interest rates.

The redemption of the bonds payable requires to write off the liability against any cash payment and close the discount or premium account on such liability and calculate if there is a profit or loss on such redemption. If the bond is redeemed before maturity, it is usually redeemed at a higher price.

We calculate the loss on redemption simply by calculating the carrying value of the bond and deducting it from the cash we are paying for redemption. The carrying value is calculated by subtracting the discount or adding the premium to the par value. Thus,

• Carrying value = 60 - 2 = 58 million
• Cash paid = 61.2 million
• loss on redemption = 61.2 - 58 = 3.2 million