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Redeeming Bonds before Maturity quiz

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  • What does it mean when a company redeems bonds before maturity?
    It means the company repurchases its bonds before their scheduled maturity date, removing the liability from its books.
  • Why might a company choose to redeem its bonds early?
    A company might redeem bonds early to stop paying interest or to take advantage of lower market interest rates.
  • How is the carrying value of a bond calculated?
    Carrying value is the face value of the bond minus any unamortized discount or plus any unamortized premium.
  • What results when the repurchase price of a bond is higher than its carrying value?
    A loss on retirement of bonds is recorded when the repurchase price exceeds the carrying value.
  • What results when the repurchase price of a bond is lower than its carrying value?
    A gain on retirement of bonds is recorded when the repurchase price is less than the carrying value.
  • Where is the gain or loss on bond retirement reported?
    The gain or loss on retirement is reported on the income statement.
  • What is the journal entry to remove bonds payable when bonds are retired?
    You debit bonds payable for the face value to remove the liability from the books.
  • How do you remove the remaining discount on bonds payable during retirement?
    You credit the discount on bonds payable for the remaining unamortized amount.
  • What is the journal entry for cash when bonds are repurchased?
    You credit cash for the amount paid to repurchase the bonds.
  • How do you calculate the amount of gain or loss on bond retirement?
    Subtract the carrying value of the bonds from the repurchase price; a positive result is a loss, and a negative result is a gain.
  • In the RX Enterprises example, what was the loss when bonds were repurchased for \$106,000 with a carrying value of \$94,600?
    The loss was \$11,400, calculated as \$106,000 minus \$94,600.
  • In the RX Enterprises example, what was the gain when bonds were repurchased for \$88,000 with a carrying value of \$94,600?
    The gain was \$6,600, calculated as \$94,600 minus \$88,000.
  • How is the discount on bonds amortized if interest is paid semiannually?
    The total discount is divided by the number of interest periods (years times two) and amortized each period.
  • What type of account balance does a loss on bond retirement have?
    A loss on retirement has a debit balance, similar to an expense.
  • What type of account balance does a gain on bond retirement have?
    A gain on retirement has a credit balance, similar to revenue.