Lahey Corporation retires its $1,000,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $1,037,450. The entry to record the redemption will include a

Question

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When bonds are retired or redeemed before maturity, any difference between the carrying amount of the bonds and the cash paid to retire them is recognized as a gain or loss. In this case, the carrying value of the bonds is $1,037,450 but they are being retired at a price over their face value, which means that Lahey Corporation is paying more cash than the carrying value of the bonds. Therefore, there is a loss on bond redemption, which is a debit to Loss on Bond Redemption account.

The entry to record the redemption will be:
Debit: Bonds Payable $1,000,000
Credit: Cash $1,050,000
Debit: Loss on Bond Redemption $12,550
Credit: Bonds Payable $1,037,450

Option A is incorrect because it suggests a credit to Loss on Bond Redemption, whereas there is actually a loss.

Option C is incorrect because it suggests a credit to Bonds Payable, but Bonds Payable will be debited to reduce it.

Option D is incorrect because it suggests a debit of $1,000,000 to Bonds Payable, but this is the face value of the bonds and not the carrying value.

Lahey Corporation Retires Its $1,000,000 Face Value Bonds at 105