Question

Several years ago, Nicole Company issued bonds with a face value of $1,120,000 for $1,005,000. As a result of declining interest rates, the company has decided to call the bond at a call premium of 4 percent over par. The bonds have a current book value of $1,094,000. Record the retirement of the bonds, using a discount account. (lfno entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Dr Bonds payable $1,120,000.00

Dr Loss on redemption of bonds $70,800.00

Cr Discount on bonds $26,000.00

Cr Cash $1,164,800.00

Step-by-step explanation:

The unamortized discount on the bond=face value-book value

face value is $1,120,000

book value is $1,094,000

unamortized discount=$1,120,000-$1,094,000=$26,000.00

Cash outflow from redeeming the debts can be calculated as follows:

$1,120,000*104%=$1,164,800.00

Upon redeeming the debt the cash account is credited with the cash payment of $1,164,800.00

The Discount on bonds payable is credited with outstanding unamortized discount of $26,000

Finally the bonds payable is debited with face value ,consequently,the difference between total credit entries minus the debit gives the loss on redemption of debt