11. Long Term Liabilities
Redeeming Bonds before Maturity
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Alright, now let's try this example. On January 1, 2012 Rx Enterprises issued a 100,000 of 7% bonds maturing in 10 years while other bonds were paying 8%. The bonds were issued at 94 and paid semi annual interest on January 1 July 1st. During 2012, the market race increased to 10%. On January 1, 2013, RX decided to repurchase the bonds when the market price was 88,000. Okay? So they told us the repurchase price again, which they generally going to have to tell you what that is, 88,000. So now we need to find the carrying value of the bonds. And guess what? It's gonna be the same thing as above, nothing's changed here, but let's go ahead and do that calculation again. So we bottom or we issued them at 94, so a 100,000 times 94%, well, that tells us 94,000 was the original amount we brought in, so we had a discount of a 100,000 minus 94,000 equals 6,000. Right? And that's 6,000 discount, we're gonna amortize over the 20 interest payment periods. 10 years, 2 payments per year, 6,000 divided by 20 is 300 per period, and it's been 2 periods, right? Because it's been 1 full year. So we've amortized 600 has been amortized. So just like we saw above, we're gonna have that same, situation where we've amortized from the 6,000 original balance in the discount account, we would have amortized 300 and another 300 and been left with 54100. Right? So 54100 is the left in the in the discount account so we would do the carrying value would be a 100,000 minus 5,400 equals the 94,600. Right? So now notice what happened. We've got a carrying value, we have this liability that we owe 94,600, but we're able to repurchase it. We're able to get it off of our books for only 88,000, right? In this case, we have a gain, right? We're gonna have a gain because we bought it back for less than it was on our books and it's a liability. So we have the 94,600 minus 88,000 that tells us that our gain in this case oh, I don't wanna mess up the math. It's been a long day. 6,600. Okay? 6,600 is gonna be our gain. Let's go ahead and make our journal entry. Okay. Just like before we know we're gonna debit bonds payable, right? We have to debit bonds payable to get it off of our books for a 100,000, and we know we got to get the discount off of our books. The discount on bonds payable has to get off of our books and that was in the amount of 5,400, right? The amount that was left, 5,400 over here that had to go to leave us with a zero balance. So that was the credit to discount on bonds payable to get it off of our books, right? We had to credit the 5,400 to get it off of our books and leave us with a zero balance. Well, what else happened? We know we paid cash, right? We had cash and we paid 88,000 in cash, but we don't balance, right? And guess what's gonna balance us? Is that gain on retirement of bonds. Let me just put gain on retirement and that is a credit, right? Gains or credits, 6,600 and we balance there, right? So in this case, notice our carrying value of the bonds, the 100,000 minus the discount is more than the repurchase price. So we have a gain, and the gain is a plug. It's what makes this balance. We needed credits of 6,600 to make this balance and we plug that in there. Cool. So that's about it for the redeeming of bonds before maturity. Let's go ahead and move on to the next
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