Question

Tyrell Company issued callable bonds with a par value of $18,000. The call option requires Tyrell to pay a call premium of $500 plus par (or a total of $18,500) to bondholders to retire the bonds. On July 1, Tyrell exercises the call option. The call option is exercised after the semiannual interest is paid the day before on June 30. Record the entry to retire the bonds under each separate situation.
1. The bonds have a carrying value of $15,000.
2. The bonds have a carrying value of $19,000.

Answer 1

Answer and Explanation:

The journal entries are shown below:

1. Bonds Payable $18,000

Loss on redemption $3,500  

  To   Discount on Bonds Payable ($18,000 - $15,000) $3,000

  To Cash ($18,000 + $500) $18,500

(Being retiring of the bond is recorded)

2. Bonds Payable $18,000

Premium on Bonds Payable ($19,000 - $18,000) $1,000

       To   Gain on redemption of bonds  $500

       To  Cash  ($18,000 + $500) $18,500

(Being retiring of the bond is recorded)

These two journal entries should be recorded