Question

Several years ago, Nicole Company issued bonds with a face value of $1,000,000 for $945,000. As a result of declining interest rates, the company has decided to call the bond at a call premium of 5 percent over par. The bonds have a current book value of $984,000. Record the retirement of the bonds, using a discount account.

Answer 1

Answer:

Record the retirement of bonds using discount account:

Retirement of bonds is the reimbursement of bonds. The equalization on the date of reimbursement will be paid-off including interest.  

It is given that the presumptive worth of bonds is $1,000,000 and the present book estimation of bonds is $984,000. They will be recovered at 5% premium. It adds up to $50,000 ($1,000,000 x 5%). On the date of reimbursement, the bond guarantor needs to pay ($1,000,000 + $50,000 + $16,000 ($1,000,000 - $984,000)) to the investor. The overabundance measure of $66,000 ($50,000 + $16,000) paid ought to be perceived as misfortune on bond call.

To record the retirement of bonds, Following are the journal entries:

Debit: Bonds payable = 1,000,000

Debit: Loss on bond call = 66,000

Credit: Discount on bonds payable = 16,000

Credit: Cash [$1.000,000 x (1 + 0.05)] = 1,050,000

[To record the retirement of bonds.]