Several years ago, Cyclop Company issued bonds with a face value of $1,000,000 for $1,045,000. 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 $1,010,000. Record the retirement of the bonds, using a premium account.

Question

Blake Holloway

Business

22 June, 08:09

Several years ago, Cyclop Company issued bonds with a face value of $1,000,000 for $1,045,000. 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 $1,010,000. Record the retirement of the bonds, using a premium account.

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Linus · Answer 1

The Journal entry is as follows:

Retirement of Bond is recorded as shown below:

Bonds payable A/c Dr. $1,000,000

Premium on bonds A/c Dr. $10,000

Loss on retirement of bonds A/c Dr. $40,000

To cash A/c $1,050,000

(For bonds retired)

Workings:

Premium on bonds:

= Current book value - Face value

= $1,010,000 - $1,000,000

= $10,000

cash = Face value + premium of 5 percent over par

= $1,000,000 + ($1,000,000 * 0.05)

= $1,000,000 + $50,000

= $1,050,000