The Titan retires a $20 million bond issue when the carrying value of the bonds is $18 million,but the market value of the bonds is $23 million.The entry to record the retirement will include:

Question

Quizplus · Accepted Answer

When a bond is retired before maturity, the carrying value and the market value may be different. The carrying value represents the amount at which the bonds are recorded in the company's accounting records, while the market value represents the current fair market value of the bonds. In this case, the market value is $23 million, which is higher than the carrying value of $18 million. When the company retires the bonds, it will have to pay the bondholders the face value of $20 million. However, since the market value is higher than the carrying value, the company will have to recognize a loss on retirement. The loss will be the difference between the amount the company pays to retire the bonds ($20 million) and the carrying value of the bonds ($18 million), or $2 million. The loss is recognized with a debit to a loss account. In addition, the company will credit bonds payable for $20 million to remove the liability from its accounting records and debit cash for $20 million to reflect the payment for the bonds. However, since the carrying value is less than the market value, the company will also have to recognize a loss on the difference between the carrying value and the market value, or $23 million - $18 million, or $5 million. The loss is recognized with a debit to the loss account, which brings the total debit to the loss account to $7 million. Answer A is therefore correct because it reflects the recognition of the loss on retirement of the bonds.

The Titan Retires a $20 Million Bond Issue When the Carrying