Because interest rates have fallen, a company retires bonds which had been issued at their face value of $200,000. The company bought the bonds back at 97. This retirement would be recorded with a:
A) debit of $200,000 to Bonds Payable, a credit of $6,000 to Gain on Bonds Retired, and a credit of $194,000 to Cash.
B) debit of $200,000 to Bonds Payable and a credit of $200,000 to Cash.
C) debit of $200,000 to Bonds Payable, a credit of $6,000 to Interest Expense, and a credit of $194,000 to Cash.
D) debit of $194,000 to Bonds Payable and a credit of $194,000 to Cash.

Question

Quizplus · Accepted Answer

When a company retires bonds before maturity, they must record the transaction in their financial statements. In this case, since the company is buying back the bonds at a discount to their face value, they will record a gain on the transaction.

The transaction would be recorded by debiting Bonds Payable for the face value of $200,000, crediting Gain on Bonds Retired for the difference between the face value and the price paid (which is $6,000 since the company bought the bonds back at 97), and crediting Cash for the price paid (which is $194,000 since the bonds were bought back at 97). Therefore, the correct answer is A.

Because Interest Rates Have Fallen, a Company Retires Bonds Which