A $200,000 bond issue with a carrying value of $206,000 is called at 101 and retired.The entry to record the retirement of bonds would be:
A) Bonds Payable 202,000
Loss on Retirement of Bonds 4,000
Cash 206,000
B) Bonds Payable 200,000
Unamortized Bond Premium 6,000
Cash 202,000
Gain on Retirement of Bonds 4,000
C) Bonds Payable 200,000
Loss on Retirement of Bonds 6,000
Cash 206,000
D) Bonds Payable 206,000
Cash 206,000

Question

Quizplus · Accepted Answer

When a bond is retired before its maturity date, the issuing company must pay the bondholders the face value of the bonds plus any unamortized bond premium or minus any unamortized bond discount.

In this case, the bonds were issued at a discount since the carrying value was higher than the face value. The company is calling the bonds at 101% of face value, which means it will pay $202,000 to retire them.

The entry to record the retirement of bonds would be to debit Bonds Payable for $200,000 (the face value), credit Unamortized Bond Premium for $6,000 (the remaining balance of premium), and credit Cash for $202,000.

Additionally, since the carrying value was higher than the face value, the company has a gain on the retirement of bonds, which should be recognized in the income statement. The gain is the difference between the carrying value and the cash paid to retire the bonds, or $4,000.

Therefore, the full entry would be:
Bonds Payable $200,000
Unamortized Bond Premium $6,000
Cash $202,000
Gain on Retirement of Bonds $4,000

A $200,000 Bond Issue with a Carrying Value of $206,000