Question

Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $10,000. If the issuing corporation redeems the bonds at 97.5, what is the amount of gain or loss on redemption?

Answer 1

Answer:

gain on redemption 15,000

the jounral entry will be:

bond payable         1,000,000 debit

        cash                                      975,000 credit

        gain on redemption                15,000 credit

        discount on Bonds Payable   10,000 credit

Explanation:

the Bond Payable account represent the face value of the bonds 1,000,000

Thus the call price is 1,000,000 x 97.5/100 = 975,000

Now, the fair value of the bond will be the net of the bonds payable:

bond payable   1,000,000

discount on BP     (10,000)  

fair value               990,000

We compare this against the amount paid:

990,000 - 975,000 = 15,000 loss

It will be a gain as we paid 975,000 for a bond worth 990,000

Answer 2

Answer:

Bonds Payable         $1000000 Dr

     Gain on redemption                   $15000 Cr

     Discount on bonds Payable      $10000 Cr

     Cash                                            $975000 Cr

Explanation:

The face value of bonds payable is $1000000 while they are a discount bond and carry a discount of $10000. The value of bonds is 1000000 - 10000 = 990000.

The bonds, however, are redeemed at 97.5 which means they are redeemed by paying 97.5% of face value which comes out to be 975000.

Thus, the difference between their value and the redemption price is the gain as value is greater than the price paid for them at redemption.

Gain = 990000 - 975000 = $15000