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 Bond Retirement,and a credit of $194,000 to Cash.
B)debit of $194,000 to Bonds Payable,a debit to Gain on Bond Retirement of $6,000,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

The difference between the face value of the bonds ($200,000) and the amount paid to retire them (97% x $200,000 = $194,000) represents a gain on bond retirement. Therefore, $200,000 is debited to Bonds Payable, $6,000 is credited to Gain on Bond Retirement, and $194,000 is credited to Cash. Option B is incorrect because the debits and credits are reversed. Option C is incorrect because the credit of $6,000 should be to Gain on Bond Retirement rather than Interest Expense. Option D is incorrect because it does not account for the gain on bond retirement.

Because Interest Rates Have Fallen,a Company Retires Bonds Which Had