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14 April, 13:03

Several years ago, Cyclop Company issued bonds with a face value of $1,550,000 for $11,295,000. As a result of declining interest rates, the company has decided to call the bonds at a call premium of 5 percent over par. The bonds have a current book value of $1,562,000. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Required: Record the retirement of the bonds, using a premium account.

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  1. 14 April, 13:31
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    Dr Bonds payable $1,550,000

    Dr premium on bonds payable $12,000

    Dr loss on bond retirement $65,500

    Cr cash $1,627,500

    Explanation:

    The premium that is yet to be amortized on the bond is currently the difference between the carrying value of $1,562,000 and the face value of $1,550,000 i. e $12,000 ($1,562,000-$1,550,000)

    The cash paid on bond retirement=$1,550,000 * (1+5%) = $1,627,500.00

    The cash payment would be credited to cash account to reflect a decrease in cash resources of Cyclop Company.

    The face value of the bond of $1,550,000 would be debited to bonds payable account.

    loss on bond retirement=$ 1,627,500.00-$1,550,000-$12,000
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