Bond Redemption - YouTube

Let's look at bond redemptions.

So what is redeeming bonds?

It is paying back the face value or the principal amount of that initial borrowing from the bond.

And companies either redeem the bonds at maturity or some bonds allow companies to pay it off early.

And this is called early redemption on the bonds.

And so before we can look at the journal entries for redeeming bonds,

we need to first look at the amortization of the premiums and discounts.

And so, as you know, bonds are issued either at a premium or a discount.

And then, over the life of the bond, we amortize those premiums and discounts.

And so once the bond reaches maturity, those premiums or discounts will be at a zero balance.

And so if we redeem the bond at maturity, you do not have to worry

about any remaining premium or discount.

Here we have Grandview Inc., and they issued a $100,000 five-year ten percent bond at 100.

Assuming the company pays and records separately the interest for the last interest period,

Grandview records the redemption of its bond at maturity.

So the $100,000 is the face value of the bond.

When Grandview originally issued that bond, they would have credited bonds payable for that $100,000.

Now the problem tells us they pay and record separately the interest.

That's just our hint that we do not need to worry about interest in this journal entry.

And then again we're redeeming it at maturity.

So that tells us that if there was a premium or discount

it would have been fully matured at this point.

So then our journal entry to record the redemption at maturity is

just a debit to bonds payable and a credit to cash for the face value of the bond.

Now if a company chooses to redeem a bond before maturity,

then there's going to be some remaining premium or discount that is not amortized.

And so because of that we'll have to also eliminate that remaining premium or discount.

What happens is, that usually creates then, a gain or a loss on the early redemption of the bonds.

So when we're redeeming the bonds before maturity,

the first thing you need to do, is to calculate the cash that is paid to redeem the bonds.

And that cash amount is usually expressed as a percentage of face value

just like it is when the bonds are initially sold.

The next thing you need to do is eliminate the carrying value of the bonds at the redemption date.

The carrying value is the face value of the bond plus the premium balance

or minus the discount balance for the bond.

And then lastly, you need to recognize a gain or a loss on the bond redemption.

And we determine the gain or loss by comparing our carrying value to the cash that is paid.

And so if the carrying value is less than the cash that they have to pay to redeem the bond,

you have a loss on bond redemption.

And if the carrying value is more than the cash, you end up with a gain on bond redemption.

So let's look at an example of a bond

that was issued at a premium and we will end up with a loss on the redemption.

So here we have Grandview Inc., it sold it's $100,000 bonds at a premium.

At the end of the fourth period, they retire these bonds at 103.

The carrying value of the bonds at redemption date is $100,400.

The one hundred thousand dollars is the face value that was original recorded

in the bonds payable account when they issued it.

Right now, the carrying value is at $100,400.

So that tells us then that if we take the carrying value minus the face value,

there is still a $400 premium on the bonds that is recorded in my financial statements.

Now it tells us they retired the bonds at 103,

which means they had to pay 103% of face value of the bond

in order to redeem them early.

And so the total cash that they would have paid $100,400.

Now we can compare our carrying value to the cash paid and since our carrying value is less than the cash paid,

we have a $2,600 loss on bond redemption.

So now we can build our journal entry.

We're going to debit bonds payable to remove the $100,000 face value of the bonds.

We're going to debit the premium on bonds payable to remove that remaining $400 premium.

We need to debit loss on bond redemption for the $2,600 dollar loss

and then credit cash for the $103,000 that was paid on that bond.

Now let's look at another example.

In this example, we still have our $100,000 face value of the bond,

but now the carrying value is 102,500.

And so by comparing the carrying value to the face value,

we can see that this bond has a $2,500 premium that is still remaining on the bond.

In this problem they redeem the bonds at 101, so we can calculate our cash amount paid

on the bond then as $101,000 dollars.

And so, when we compare our carrying value to the cash paid,

since our carrying value of 102,500 is more than 100,000,

we end up with a $1,500 gain on the bond redemption

And so when we build our journal entry,

we're still going to debit bonds payable for the face value. That never changes.

We need to debit the premium for the remaining $2,500 premium to get rid of it.

Then we're going to credit the gain on bond redemption because it's a revenue.

And then we credit cash for the $101,000 that they paid to the bondholders.

Now let's look at an example of the bond being issued at a discount but with a loss on redemption.

So again we have Grandview with a $100,000 face value for the bond.

And now our carrying value is $98,700.

So when we compare the carrying value to the face value we can determine

that there is still a $1300 discount outstanding on that bond.

So it was originally issued a discount and there's still a $1300 discount that has not been amortized.

In order to redeem the bonds, they were paid at 102,

which means that the company had to pay $102,000 to redeem the bond.

And so when we compare a carrying value to the cash that they paid,

we can determine then that there's a $3,300 loss on the bond redemption.

And so now we can build our journal entry.

We're going to debit bonds payable to remove the face value of 100,000.

We're going to debit the loss on bond redemption for $3,300 because a loss is an expense.

Then we're going to credit the discount on bonds payable to remove that discount

because the discount is a debit normal balance.

So we're crediting it here to remove it.

And then we credit cash for the amount of cash that was paid.

And now let's look at our last example where the bond is issued at a discount

but with a gain on the redemption.

So again we have our $100,000 face value.

And now our carrying value is 97,500.

So we can calculate by comparing our carrying value minus the face value.

And determine that there's a $2500 discount outstanding on this bond at the time of redemption.

The problem tells us they retired them at 96,

which means they retired them at 96 percent of face value, which is only $96,000.

And so when we compare our carrying value to our cash paid,

we can see that in this case the carrying value was more than the cash paid

and so they end up with $1500 gain on the bond redemption.

And so to build our journal entry,

we debit the bonds payable for the face value.

We credit the discount on bonds payable to remove the discount.

We credit gain on bond redemption for the $1500 gain

and then we credit cash for the 96,000 that they had to pay in cash.

Okay? So now we've gone through all the steps

for redeeming the bonds at maturity, right?

Step one is to record the cash paid, which is usually a credit to cash.

Step two is to eliminate the carrying value, which is always a debit to bonds payable

and then either you're going to debit the premium or credit the discount to clear those out.

And then in step three you recognize the gain or the loss on the redemption.

And it's a debit if it's a loss and it's a credit if it's a gain

because a loss is an expense and a gain is a revenue.