Question

On January 1, 2020, Echo Company issued $550,000, 16 year, 9%, annual, callable bonds for $475,000. On December 31, 2025, Echo Company redeemed (called) the bonds at 102. REQUIRED: 1. Prepare the Journal Entry to record the Issuance of the Bond 2. Determine the amount of the Discount/Premium that is still not amortized (using the Straight-Line Method) 3. Prepare the Journal Entry to record the Retirement (Redemption) of the Bond.

Answer 1

1. Prepare the Journal Entry to record the Issuance of the Bond

January 1, 2020, bonds issued at a discount

Dr Cash 475,000

Dr Discount on bonds payable 75,000

Cr Bonds payable 550,000

2. Determine the amount of the Discount/Premium that is still not amortized (using the Straight-Line Method)

total bond life = 16 years, 5 years have passed

amortization of bond discount per coupon payment = $75,000 / 16 = $4,687.50

so $51,562.50 have not been amortized yet

3. Prepare the Journal Entry to record the Retirement (Redemption) of the Bond.

Before being able to redeem the bonds, the remaining discount must be amortized:

December 31, 2025, amortization of bond discount

Dr Interest expense 51,562.50

Cr Discount on bonds payable 51,562.50

the journal entry to record the redemption of the bonds

December 31, 2025, bonds redeemed at a loss

Dr Bonds payable 550,000

Dr Loss on retirement of debt 11,000

Cr Cash 561,000