Q10SE_3 - 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

The amount of gain on retirement is $7,000.

Step 1: Definition of gain on retirement of bond

The gain on retirement of bond is the situation when the company purchase their own bond below the carrying value of the bond.

Step 2: Gain or loss on retirement

Gain or loss on retirement
Carrying amount of bonds	$350,000
Cash Paid	($343,000)
Gain on the retirement of the bonds		$7,000