Question

Tyrell Company issued callable bonds with a par value of $36,000. The call option requires Tyrell to pay a call premium of $500 plus par (or a total of $36,500) 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 $28,500.
2. The bonds have a carrying value of $37,000.

Answer 1

Answer and Explanation:

The Journal entry is shown below:-

1. Bond Payable Dr, $36,000

Loss on retirement of bond Dr, $8,000

     To Cash $36,500

     To Discount on bond payable $7,500

(Being early retirement of bond is recorded)

For recording the early retirement of bond we debited the Bond Payable as it decreasing the liability and Loss on retirement of bond as it is a loss and we credited the cash as it decreases and Discount on bond payable as it is a balancing figure.

2. Bond Payable Dr, $36,000  

Premium on bond payable Dr, $1,000

     To Cash $36,500

     To Gain on retirement of bond $500

(Being early retirement of bond is recorded)

For recording the early retirement of bond we simply debited as it decreasing the liability and we credited the Gain on retirement of bond as it is a income.