On January 1,Year 1,Williams Corporation issued $200,000 of callable bonds at face value.The bonds carried a 2% call premium.If Williams calls the bonds,how would this event affect the company's accounting equation?

Question

Quizplus · Accepted Answer

Call premium = Face value of $200,000 × 2% = $4,000
Call price = Face value of $200,000 + Call premium of $4,000 = $204,000
When the bonds are called,Williams must pay the bondholders the $200,000 face value of the bonds,plus a 2% call premium,or $4,000.The event will decrease assets (cash)by $204,000,decrease liabilities (bonds payable)by $200,000,and decrease stockholders' equity (retained earnings)by $4,000.

On January 1,Year 1,Williams Corporation Issued $200,000 of Callable Bonds