Question

Ajax, Inc., issued callable bonds with a par value of $1,000,000 that require the payment of a call premium of $10,000. The bonds have a carrying value of $990,000. We call these bonds prior to maturity on September 30.

Required:
Write down journal entry.

Answer 1

Answer: please see explanation column for answers.

Explanation:

The journal entry is as follows:

To record the bonds payable and retirement

Date                   Account titles and explanation    Debit           Credit

Sept 30,       Bonds payable                            $1,000,000

Loss on bonds retirement                              $20,000

             To Discount on bond                                                   $10,000

                To cash                                                                      $1,010,000

Calculation:

Loss on bonds retirement:Total Cash disbursements - carrying value  

= (par value of the bonds+ call premium) -carrying value

= ($1,000,000 + $10,000) - $990,000

= $1,010,000 - $990,000

= $20,000