Al-Quds Corporation retires its bonds at 105 on January 1, after the payment of interest. The...

Al-Quds Corporation retires its bonds at 105 on January 1, after the payment of interest. The face value of the bonds is $560,000. The carrying value of the bonds at retirement is $579,500. The entry to record the retirement will include a:
Select one:
a. debit of $28,000 to Premium on Bonds Payable.
b. credit of $8,500 to Loss on Retirement of Bonds.
c. credit of $8,500 to Gain on Retirement of Bonds.
d. debit of $19,500 to Premium on Bonds Payable.

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Abdul-Rahim Taysir

Solutions

Expert Solution

Carrying Value of the bonds at retirement = $579,500

Retirement Value of Bonds = Face Value $560,000 * 105% = $588,000

To retire the bonds company will pay $588,000 as against the carrying value of bonds $579,500

The company will pay more than its carrying value, it means company will incur loss on retirement of bonds.

Loss on Retirement of BOnds = Payment required to retire bonds $588,000 - Carrying Value of bonds $579,500

= $8,500

The carrying value of bonds is higher than its face value, it means bonds were issued at premium.

So the company will close Unamortized Premium account & bonds payable account on retirement on bonds.

Unamortized Premium = Carrying Value $579,500 - Face Value $560,000 = $19,500

The below entry is required to retire the bonds:

Debit -- Bonds Payable (face value) $560,000

Debit -- Premium on Bonds Payable (Unamortized Portion) $19,500

Debit -- Loss on retirement of bonds $8,500

Credit -- Cash (Retirement Value) $588,000

Hence, the correct option is d. debit of $19,500 to Premium on Bonds Payable.

ekkarill92 answered 1 year ago

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