Magic Mountain retires its 8% bonds for $126,000 before their scheduled maturity. At the time, the bonds have a face value of 124,000 and a carrying value of $116,000.
Record the early retirement of the bonds. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
To record the early retirement of the bonds for Magic Mountain, you need to account for the difference between the bond's carrying value and the amount paid to retire the bonds. Here's how to record the entry:
1. Determine the difference between the carrying value and the amount paid:
Amount paid for early retirement = $126,000
Carrying value of the bonds = $116,000
Difference = amount paid - carrying value = $126,000 - $116,000 = $10,000
2. Create the journal entry to record the early retirement of the bonds:
Debit: Bonds Payable (face value of the bonds) $124,000
Debit: Premium on Bonds Payable (carrying value - face value) $ (116,000 - 124,000) = $ (8,000)
Debit: Loss on Early Retirement of Bonds (difference) $10,000
Credit: Cash (amount paid) $126,000
3. Summarized journal entry:
Debit: Bonds Payable $124,000
Debit: Premium on Bonds Payable $8,000
Debit: Loss on Early Retirement of Bonds $10,000
Credit: Cash $126,000
Note: The loss on early retirement arises because the amount paid exceeds the carrying value of the bonds.