Q10SE_2 - Horngren'S Financial And Managerial Accounting

Question

Retiring bonds payable before maturity

On January 1, 2018, Powell Company issued $350,000 of 10%, five-year bonds

payable

at 102. Powell Company has extra cash and wishes to retire the bonds payable

on

January 1, 2019, immediately after making the second semiannual interest

payment. To

retire the bonds, Powell Company pays the market price of 98.

Requirements

1. What is Powell Company’s carrying amount of the bonds payable on the

retirement

date?

2. How much cash must Powell Company pay to retire the bonds payable?

3. Compute Powell Company’s gain or loss on the retirement of the bonds

payable.

Step-by-Step Solution

Answer

Answer:

The cash paid on retirement is $343,000.

Step 1: Definition of bond maturity value

Bond maturity value is the final settlement amount paid by the company to the

bondholder after the completion of holding period.

Step 2: Amount paid on retirement

$$\begin{gathered} AmoutPaid=FaceValue\times RateofIssue \\ =\$350,000\times 98\% \\ =\$343,000 \end{gathered}$$