Journal entry for retirement of bonds before maturity
Introduction
Sometimes, we may decide to make the retirement of the bonds by calling back the bonds that we have issued before their maturity when we have sufficient cash on hand. In this case, we need to make the journal entry for the retirement of bonds before maturity which may lead to have a loss or gain on the income statement as a result.
In normal circumstances, we usually make a loss when we decide to retire the bond that we have issued before its maturity. This is because we usually need to pay a price that is greater than the bond’s carrying value when we call it back.
However, when there is a big increase in the market interest rate, we may be able to call back or retire the bond at a lower price than its carrying. This will give a profit or gain on the bond retirement that we call back.
One of the reasons that could be the case is that the holders of the bonds usually do not want to keep holding on to the bonds that give an interest that is much lower than the market interest rate. Hence, they may decide to sell the bonds at a lower price in order to buy better investment securities that give them higher returns.
Of course, if we retire the bonds before their maturity by calling them back at their carrying value, there won’t be any gain or loss.
Journal entry for retirement of bonds before maturity
As mentioned, the retirement of bonds before maturity may result in the loss or gain besides the case that we may call the bonds back at their carrying value.
Retirement of bonds before maturity with a loss
If there is a loss on the bond retirement, we can make the journal entry for the retirement of bonds before maturity by debiting the bonds payable account and the loss on bond retirement account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Bonds payable | XXXX | |
| Loss on bond retirement | XXXX | |
| Cash | XXXX |
Retirement of bonds before maturity with a gain
On the other hand, we can make the journal entry for the gain on bond retirement before maturity with the debit of bonds payable account and credit of the gain on bond retirement account and the cash account.
| Account | Debit | Credit |
|---|---|---|
| Bonds payable | XXXX | |
| Gain on bond retirement | XXXX | |
| Cash | XXXX |
Without a gain or loss
If there is no gain nor loss, we can make the journal entry for the retirement of the bonds before maturity by debiting the bonds payable account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Bonds payable | XXXX | |
| Cash | XXXX |
Example for the retirement of bonds before maturity
For example, we have issued $100,000, five-year, 8% bonds at their face value for $100,000. Later, at the end of the fourth year of the maturity of the bond, we decide to retire those bonds by calling them back for $102,000.
In this case, we make a loss of $2,000 ($102,000 – $100,000) as the carrying value of the bonds is only $100,000, but we pay $102,000 to recall them back.
Likewise, we can make the journal entry for the retirement of bonds before the maturity by debiting the $2,000 loss amount to the loss on bond retirement account as below:
| Account | Debit | Credit |
|---|---|---|
| Bonds payable | 100,000 | |
| Loss on bond retirement | 2,000 | |
| Cash | 102,000 |
Retirement of discount or premium bonds before maturity
Of course, we may also issue discount bonds or premium bonds to the capital market in addition to the bonds that are issued at their face value.
The discount bond is the type of bond that is issued at an amount that is less than its face value while the premium bond is the bond that is issued at a price that is greater than its face value. And the discount bond or premium bond is usually amortized over its maturity.
In this case, when we retire these types of bonds before their maturities, some portion of the discount or premium of the bonds is usually still on the balance sheet. Hence, we need to also remove them together with the bonds payable from the balance sheet when we make bonds retirement.
Likewise, the journal entries for the retirement of bonds before their maturity will also include the unamortized bond discount account or the unamortized bond premium account for the discount bonds or premium bonds.
Retirement of premium bonds before matuirty
Loss on retirement of premium bonds before maturity
We can make the journal entry for loss on retirement of the premium bonds by removing the premium portion of the bonds from the balance sheet with the debit of unamortized bond premium account as below:
| Account | Debit | Credit |
|---|---|---|
| Bonds payable | XXXX | |
| Unamortized bond premium | XXXX | |
| Loss on bond retirement | XXXX | |
| Cash | XXXX |
Gain on retirement of premium bonds before maturity
In case of gain on retirement of premium bonds, we can make the journal entry as below instead:
| Account | Debit | Credit |
|---|---|---|
| Bonds payable | XXXX | |
| Unamortized bond premium | XXXX | |
| Gain on bond retirement | XXXX | |
| Cash | XXXX |
Retirement of discount bonds before maturity
Loss on retirement of discount bonds before maturity
For the loss on the retirement of discount bonds, we can make the journal entry to remove the unamortized portion of bond discount from the balance by crediting the unamortized bond discount as below:
| Account | Debit | Credit |
|---|---|---|
| Bonds payable | XXXX | |
| Loss on bond retirement | XXXX | |
| Cash | XXXX | |
| Unamortized bond discount | XXXX |
Gain on retirement of discount bonds before maturity
On the other hand, we can make the journal entry for gain on retirement of discount bonds by debiting the bonds payable account and crediting the gain on bond retirement account and cash account together with the debit of the unamortized bond discount account to remove it from the balance sheet.
| Account | Debit | Credit |
|---|---|---|
| Bonds payable | XXXX | |
| Gain on bond retirement | XXXX | |
| Cash | XXXX | |
| Unamortized bond discount | XXXX |
Example:
For example, we have issued $100,000, five-year, 8% bonds for $105,000 which is 105% of their face value. This is because the bonds that we have issued are premium bonds.
Later, at the end of the fourth year, we decide to call them back for $98,000 in order to make the bond retirement. And at the time of bond retirement, there is still a $1,000 unamortized bond premium on the balance sheet.
In this case, we make a gain of $ 3,000 ($100,000 + $1,000 – $98,000) when we make the bonds retirement. This is because there is a big increase in the market interest rate at the time that we call back the bonds for retirment.
Likewise, we can make the journal entry for gain on the retirement of premium bonds before maturity as below:
| Account | Debit | Credit |
|---|---|---|
| Bonds payable | 100,000 | |
| Unamortized bond premium | 1,000 | |
| Gain on bond retirement | 3,000 | |
| Cash | 98,000 |
Retirement of bonds at the maturity date
If we retire the bonds at the maturity date, we can make the journal entry for the retirement of bonds at maturity by simply debiting the bonds payable account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Bonds payable | XXXX | |
| Cash | XXXX |
This journal entry will be the same for the retirement of discount bonds as well as the retirement of premium bonds. This is because, at the maturity date, the unamortized bond discount or unamortized bond premium will already become zero. In other words, all the unamortized portions of the discount or premium bond will already have been amortized at the end of the bond maturity.
