Question

Several years ago, Cyclop Company issued bonds with a face value of $1,550,000 for $11,295,000. As a result of declining interest rates, the company has decided to call the bonds at a call premium of 5 percent over par. The bonds have a current book value of $1,562,000. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Required: Record the retirement of the bonds, using a premium account.

Answer 1

Dr Bonds payable $1,550,000

Dr premium on bonds payable $12,000

Dr loss on bond retirement $65,500

Cr cash $1,627,500

Step-by-step explanation:

The premium that is yet to be amortized on the bond is currently the difference between the carrying value of $1,562,000 and the face value of $1,550,000 i.e $12,000($1,562,000-$1,550,000)

The cash paid on bond retirement=$1,550,000*(1+5%)=$1,627,500.00

The cash payment would be credited to cash account to reflect a decrease in cash resources of Cyclop Company.

The face value of the bond of $1,550,000 would be debited to bonds payable account.

loss on bond retirement=$ 1,627,500.00-$1,550,000-$12,000