Question

On January 2, 2014, Bengro Corporation issued $4,500,000 of 10% bonds at 96 due December 31,...

On January 2, 2014, Bengro Corporation issued $4,500,000 of 10% bonds at 96 due December 31, 2023. Interest on the bonds is payable annually each December 31. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable “effective interest method.”) The bonds are callable at 102 (i.e., at 102% of face amount), and on January 2, 2020, Bengro called all of the bonds and redeemed them.

Prepare Bengro’s journal entry to record the early extinguishment of the bonds payable.

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Answer #1
Account Titles and Explanation Debit Credit
Bonds payable 4500000
Loss on redemption of bonds 162000
      Discount on Bonds payable 72000
      Cash 4590000
Workings:
Discount on issue 180000 =4500000*(1-0.96)
Discount amortized for 6 years 108000 =180000*6/10
Discount unamortized 72000 =180000-108000
Amount paid for redemption 4590000 =4500000*1.02
Less: Carrying value of bonds redeemed 4428000 =4500000-72000
Loss on redemption 162000
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