Answer:
The Journal entry is as follows:
Retirement of Bond is recorded as shown below:
Bonds payable A/c Dr. $1,000,000
Premium on bonds A/c Dr. $10,000
Loss on retirement of bonds A/c Dr. $40,000
To cash A/c $1,050,000
(For bonds retired)
Workings:
Premium on bonds:
= Current book value - Face value
= $1,010,000 - $1,000,000
= $10,000
cash = Face value + premium of 5 percent over par
= $1,000,000 + ($1,000,000 × 0.05)
= $1,000,000 + $50,000
= $1,050,000
Based on the face value of the bond, the retirement of the bond by Cyclop Company will be recorded as:
Date Account Title Debit Credit
Bonds payable $1,000,000
Loss on bond call $ 40,000
Bond premium $10,000
Cash $1,050,000
The bonds payable account is to be debited with the face value of $1,000,000.
Bond premium:
= Current market value - Face value
= 1,010,000 - 1,000,000
= $10,000
The cash paid is:
= face value of bond x ( 1 + 5%)
= 1,000,000 x 1.05
= $1,050,000
The loss on the bond call is:
= Cash paid - bond current value - bond premium
= 1,050,000 - 1,010,000 - 10,000
= $40,000
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