Highlight An Illustration Of Bond Redemption Three Year 8 Bonds Of 100 000 Issue

Highlight an illustration of bond redemption:

Three year 8% bonds of $100,000 issued on Jan. 1, 20X7, are recalled at 105 on Dec. 31, 20X8. Expenses of recall are $2,000. Market interest on issue date was 10% (so the carrying amount of bond at issue was $95,027).

Journal entry at Dec. 31, 20X7:

Db Bonds payable       100,000

Db Loss on extinguishment 8,817

Cr Cash                       107,000

Cr Discount on bonds payable       1,817

Reacquisition price = $105,000 + 2,000 = $107,000

If you see redemption problem…like on a Test…remember at the time of reacquisition, any unamortized premium or discount, and any costs of issue related to the bonds must be amortized up to the reacquisition date to avoid misstatement of any resulting gain or loss on the extinguishment. The difference between the reacquisition price and the net carrying amount of the debt is a gain (reacquisition price lower) or loss (reacquisition price greater) from extinguishment. (Similar to depreciation on the sale of a fixed asset sale).

How would this journal entry change if you redeemed only 50% of the issue?

Please show all work