Question

53. A company issued $2,000,000, 5 years, 10% bonds, receiving $1,800,000 in cash on January 1, 2019. On January 1, 2021 after the bond interest payment was made, the company purchased 20% of the bond issue on the open market at 110 and retired them. Prepare the journal entry to record the retirement of these bonds. (5 points) Debit Credit Description Date

Answer 1

Its given that the company has issued $2,000,000 worth of bonds for a period of 5 years at a discount of $200,000 ( $2,000,000 - $1,800,000 ) as on January 1,2019,

When a bond is issued at discount, the company should amortize the discount over the term of bond. Therefore amortization of discount per year will be $40,000 ( $200,000 / 5 ).

Hence, the outstanding balance of discount on bonds account as on January 1,2021 will be,

Opening balance as on Jan 1,2019	$                 200,000
Less: amortization	$                   40,000
Balance as on Jan 1,2020	$                 160,000
Less: amortization	$                   40,000
Balance as on Jan 1,2021	$                 120,000

Journal entry for retirement of bond will be

Date	Description	Computation	Debit	Credit
Jan 1,2021	Bonds payable A/c	($2,000,000 * 20%)	$          4,00,000
	Loss on retirement of bonds A/c		$             64,000
	To Cash A/c	($400,000 * 110/100)		$          440,000
	To Discount on bonds A/c	($120,000 * 20%)		$            24,000