LO9–7 Record gain or loss on retirement of bonds.
Call Kai
Learn
Practice Test
Spaced Repetition
Match
Flashcards
Knowt Play1/17
There's no tags or description
Looks like no tags are added yet.
Name | Mastery | Learn | Test | Matching | Spaced | Call with Kai |
|---|
No analytics yet
Send a link to your students to track their progress
18 Terms
What happens to a bond’s carrying value at maturity?
It always equals the face amount, whether issued at discount, face, or premium.
How does a company record bond retirement at maturity?
Debit Bonds Payable $100,000
Credit Cash $100,000
Is there a gain or loss when bonds are retired at maturity?
No. Carrying value = face value, so no gain or loss.
What is an early extinguishment of debt?
Retiring (buying back) bonds before their scheduled maturity date.
How can a company retire bonds early?
Using a call feature or by purchasing the bonds on the open market.
How do you determine gain or loss on early retirement?
Compare price paid to carrying value.
When does a company record a loss on early retirement?
When the price paid > carrying value.
When does a company record a gain on early retirement?
When the price paid < carrying value.
Why did California Coasters have a loss in the example?
They paid $114,353 to retire bonds with a carrying value of $106,877.
How much was the loss on early retirement in the example?
$7,476 (= 114,353 – 106,877).
What accounts are removed when retiring bonds early?
Bonds Payable and any remaining Premium or Discount.
Where are gains and losses on early extinguishment reported?
On the income statement.
When do bond prices go up?
When interest rates drop
Why does the premium decrease before maturity?
Because it is amortized each period, lowering carrying value.
What caused the repurchase price to rise to $114,353?
Market interest rates fell to 5%, increasing bond prices.
What is the key rule for early retirement?
Gain or loss = price paid – carrying value.
What is the journal entry when a company retires bonds early for more than their carrying value?
THIS WOULD BE A LOSS
Debit Bonds Payable 100,000
Debit Premium on Bonds Payable 6,877
Debit Loss on Early Extinguishment 7,476
Credit Cash 114,353
What is the journal entry when a company retires bonds early for less than their carrying value?
THIS IS A GAIN
Assume:
Carrying value = $106,877
Price paid to retire = $102,000
Face value = $100,000
Remaining premium = $6,877
Since price paid < carrying value, the company records a gain.
Debit Bonds Payable 100,000
Debit Premium on Bonds Payable 6,877
Credit Cash 102,000
Credit Gain on Early Extinguishment 4,877
(because 106,877 – 102,000 = 4,877 gain)