Question

Several years ago, Tamika Company issued bonds with a face value of $603,000 at par. As a result of declining interest rates, the company has decided to call the bond at a call premium of 7 percent over par.
Required:
Record the retirement of the bonds.

Answer 1

Bond retirement is also known as bond reimbursement. The equalization will be repaid with interest on the reimbursement date.

When recording bond retirements, use a discount account:

Bonds are assumed to be worth $603,000, and their current book value is estimated to be $645,210. T will be paid back with a 7% premium. $42,210 is the total ($603,000 x 7%). The bond guarantor must give the investor $65,210 ($603,000 + $42,210) on the date of reimbursement. The $42,210 excess payment should be viewed as bad luck for the bond call.

Here are the journal entries to reflect bond retirement:

Bonds payable are debited by $603,000

Debit: $42,210 is the loss on bond call.

Citation: Cash $642,210 = [$603,000 x (1 + 0.07)]

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