The balance sheet for Lemay Company reports the following information on July 1, 2012.
Long-term liabilities
Bonds payable $1,000,000
Less: Discount on bonds payable
60,000
$940,000
Lemay decides to redeem these bonds at 101 after paying semiannual interest. Prepare the journal entry to record the redemption on July 1, 2012
Debit:
Debit
credit:
credit Discount on Bonds Payable $60,000
I just know that last part is right. I'm so confused about the rest
3 Answers
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Here's an easy way to look at it. Before the bonds were redeemed these were their balances.
Bonds Payable 1,000,000 (credit balance)
Discount on Bonds Payable 60,000 (debit balance)
These accounts need to be taken off the books when the bonds are redeemed. In order to do that you have to record them in the opposite manner from the way they are currently listed.
Dr Bonds Payable 1,000,000
Cr Discount on Bonds Payable 60,000
Also, since the bonds were sold at 101 (that's 101% of the face value) you paid out 1,000,000 x 101% = $1,010,000 in cash. So you can add that to your entries
Dr Bonds Payable 1,000,000
Cr Cash 1,010,000
Cr Discount on Bonds Payable 60,000
Now you just have one more entry to make. This will be your loss or gain. If it's a debit it's a loss. If it's a credit, it's a gain. You know that debits have to equal credits. So in order to make the transaction balance, you would need a debit (loss) of 70,000.
Dr Bonds Payable 1,000,000
Dr Loss on Bond Redemption 70,000
Cr Cash 1,010,000
Cr Discount on Bonds Payable 60,000
Another way to look at it is that if the carrying value of the bonds ($940,000) is less than the cash given ($110,000) there is a loss. If the carrying value is more, there is a gain.
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Redemption Accounting
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DR Bonds redemption $1,000,000
DR Premium of redemption $ 10,000
CR Bank $ 950,000
CR discount on redemption $ 60,000
