Aire Corporation retires its bonds at 106 on January 1, following the payment of semi-annual interest. The face value of the bonds is $600,000. The carrying value of the bonds at the redemption date is $631,500. The entry to record the redemption will include a A. credit of $31,500 to Premium on Bonds Payable. B. credit of $31,500 to Loss on Bond Redemption. C. credit of $5,250 to Gain on Bond Redemption. D. debit of 4,500 to Loss on Bond Redemption

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Business

Zoe Mccormick

1 January, 09:05

Aire Corporation retires its bonds at 106 on January 1, following the payment of semi-annual interest. The face value of the bonds is $600,000. The carrying value of the bonds at the redemption date is $631,500. The entry to record the redemption will include a A. credit of $31,500 to Premium on Bonds Payable. B. credit of $31,500 to Loss on Bond Redemption. C. credit of $5,250 to Gain on Bond Redemption. D. debit of 4,500 to Loss on Bond Redemption

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Gabriela Savage · Answer 1

Option D, a debit of $4,500 to loss on bond redemption

Explanation:

The amount of cash payable to investors on redemption is $600,000*106%=$636,000

The entries to be passed are:

Dr Bonds payable $600,000

Dr Premium on the bond ($631,500-$600,000) $31,500

Dr Loss on redemption ($636,000-$631,500) $4,500

Cr Cash $636,000

The correct option is a debit of $4,500 to loss on bond redemption

Option A is wrong because it should be been a debit to bonds premium not a credit

Option B is wrong because the actual loss is $4,500 not $31,500

Option C is also incorrect because no gain was made on redemption