Several years ago, cyclop company issued bonds with a face value of $1,000,000 for $1,045,000. as a result of declining interest rates, the company has decided to call the bonds at a call premium of 5 percent over par. the bonds have a current book value of $1,010,000. record the retirement of the bonds, using a premium account.

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

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