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QUESTION 4 On January 1 of Year 1, Lily Company issued a $30,000, 10%, 20-year bond....

QUESTION 4 On January 1 of Year 1, Lily Company issued a $30,000, 10%, 20-year bond. Interest is paid annually each December 31, so the first contract interest payment was made on December 31 of Year 1. On the day the bond was issued, the market interest rate on bonds with the same degree of riskiness was 12% compounded annually. The issue price of the bond was $25,518. This bond was retired on January 1 of Year 3, just one day after the second contract interest payment was made. The carrying value of the bond at the time of retirement was $25,650. The total amount paid to retire this bond was $29,700. Lily uses the effective-interest method on its books. The entry to record the retirement of this bond would include a DEBIT to Loss on Bond Retirement of $4,350 DEBIT to Discount on Bonds of $4,550 CREDIT to Discount on Bonds of $4,650 CREDIT to Discount on Bonds of $4,250 DEBIT to Premium on Bonds of $4,450 DEBIT to Premium on Bonds of $4,538 CREDIT to Premium on Bonds of $4,450 DEBIT to Loss on Bond Retirement of $4,050

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Answer #1

Carrying value of bonds at the time of retirement = $25,650

Cash paid to retire bonds = $29,700

Par value of bonds = $30,000

Loss on bonds retirement = Cash paid to retire bonds- Carrying value of bonds at the time of retirement

= 29,700-25,650

= $4,050

The following entry will be made to retire bonds:

General Journal Debit Credit
Bonds payable $30,000
Loss on bonds retirement $4,050
Discount on bonds payable $4,350
Cash $29,700

Last option is correct option.

DEBIT to Loss on Bond Retirement of $4,050

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