Sigma Company issued $12 million in 10 percent bonds 6 years ago currently having a carrying amount of $10.7 million. The bond agreement allows for early extinguishment by Sigma Company beginning in the current year. Sigma's investment bank has arranged for the company to issue $10 million of new 8 percent bonds at face value to a group of investors. The proceeds will be used to extinguish the 10 percent bonds. The banking, legal, and accounting costs to execute the transaction total $200,000. The journal entry to record the debt extinguishment will include:

Question

Quizplus · Accepted Answer

The journal entry to record the debt extinguishment would include a credit to Bonds Payable-10% for $12,000,000 (the face value of the bonds), a debit to Cash for $10,000,000 (proceeds received from the new 8% bond issuance), and a credit to Gain on Extinguishment of 10% Bonds for $500,000 (the difference between the carrying amount of $10.7 million and the amount paid of $11.2 million, after accounting for the costs of the transaction). Therefore, the correct choice is B. There is no entry required for the banking, legal, and accounting costs to execute the transaction.

Sigma Company Issued $12 Million in 10 Percent Bonds 6