Question

Farmland Corporation issued $400,000 of 10-year bonds at a discount. Prior to maturity, when the carrying value of the bonds was $388,000, the company redeemed the bonds at 99. Prepare the entry to record the redemption of the bonds

Answer 1

Answer:

Please see journal entries below

Explanation:

The entries below are made in the books of Farmland Corporation, the issuer of the bond.

Upon redemption, journal entries would be as follows.

Debit: Bond Account $396,000 (cash paid to bond investors)

Credit: Cash/Bank Account $396,000 (cash paid to bond investors)

Debit: Profit/Loss Account $8,000 (premium paid over carrying value of bond, calculated below: )

Credit: Bond Account $8,000 (premium paid over carrying value)

Premium over carrying value is calculated as follows:

Redemption value - carrying value

= $(\frac{redemption price}{carrying price} *face value) - carrying value$

=$(\frac{99}{100} * 400,000) - 388,000$

= $396,000 - $388,000

= $8,000

Answer 2

Based on the value of the bonds and the carrying value, the entry to record the redemption of the bonds is:

Date                Account Title                                      Debit                 Credit

                     Bonds Payable                                   $400,000

                     Loss on bond retirement                   $    8,000

                     Discount on bond payable                                        $12,000

                     Cash                                                                          $396,000

What is the entry for the redemption?

The bond payable account will be debited by the face value of $400,000.

The cash account will be credited by the redemption value of:

= 400,000 x 0.99

= $396,000

The discount on bond payable is:

= 400,000 - 388,000

= $12,000

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