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9 November, 05:50

Aire Corporation retires its bonds at 106 on January 1, following the payment of semi-annual interest. The face value of the bonds is $600,000. The carrying value of the bonds at the redemption date is $631,500. The entry to record the redemption will include a A. credit of $31,500 to Premium on Bonds Payable. B. credit of $31,500 to Loss on Bond Redemption. C. credit of $5,250 to Gain on Bond Redemption. D. debit of 4,500 to Loss on Bond Redemption

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  1. 9 November, 06:09
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    Option D, a debit of $4,500 to loss on bond redemption

    Explanation:

    The amount of cash payable to investors on redemption is $600,000*106%=$636,000

    The entries to be passed are:

    Dr Bonds payable $600,000

    Dr Premium on the bond ($631,500-$600,000) $31,500

    Dr Loss on redemption ($636,000-$631,500) $4,500

    Cr Cash $636,000

    The correct option is a debit of $4,500 to loss on bond redemption

    Option A is wrong because it should be been a debit to bonds premium not a credit

    Option B is wrong because the actual loss is $4,500 not $31,500

    Option C is also incorrect because no gain was made on redemption
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