Question

On July 1, Aloha Co. exercises a call option that requires Aloha to pay $408,000 for its outstanding bonds that have a carrying value of $411,200 and par value of $400,000. The company exercises the call option after the semiannual interest is paid the day before on June 30. Record the entry to retire the bonds.

Answer 1

Answer:

July 1       Bonds Payable                        400000 Dr

               Premium on Bonds Payable   11200 Dr

                    Cash                                        408000 Cr

                    Gain on Redemption              3200 Cr

           

Explanation:

The data provided for the carrying value and other amounts is of 1st July thus the statement regarding the interest payment is irrelevant.

The bonds are redeemed at 408000 which is less than their carrying value which is 411200 ( face value of 400000 and premium of 11200 ). Thus, we can conclude that there is a gain on early redemption.

The gain on redemption = 411200 - 408000 = 3200

The entry for this event will require to close the bond payable and related premium account by debiting them and crediting the cash and gain account.