Question

Tyrell Company issued callable bonds with a par value of $24,000. The call option requires Tyrell to pay a call premium of $500 plus par (or a total of $24,500) to bondholders to retire the bonds. On July 1, Tyrell exercises the call option. The call option is exercised after the semiannual interest is paid the day before on June 30. Record the entry to retire the bonds under each separate situation.

1. The bonds have a carrying value of $19,500.

2. The bonds have a carrying value of $25,000.

Answer 1

case 1)

bonds payable 24,000

loss on retirement 5,000

discount on BP 4,500

cash 24,500

case 2)

bonds payable 24,000 debit

premium on BP 1,000 debit

gain on retirement 500 credit

cash 24,500 credit

Step-by-step explanation:

we are going to write off the bonds payable and their discount account

we also debit the cash account for the amount of cash outlay to retire the bond

the difference between cash and the carrying value will be the loss on retirement when lower

and a gain on retirement when higher.

case 1)

carrying value 19,500

total cash outlay (24,500)

loss on retirement (5,000)

case 2)

carrying value 25,000

total cash outlay (24,500)

gain on retrement 500