Question

Novak Company had bonds outstanding with a maturity value of $312,000. On April 30, 2020, when these bonds had an unamortized discount of $10,000, they were called in at 106. To pay for these bonds, Novak had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 101 (face value $312,000).

Ignoring interest, compute the gain or loss.

Loss on redemption

$

Ignoring interest, record this refunding transaction. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Account Titles and Explanation	Debit	Credit
(To record redemption of bonds payable)
(To record issuance of new bonds)

Answer 1

Loss on redemption    [Refer working note]

$28,720

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Account Titles and Explanation	Debit	Credit
Bonds Payable                                        [Par value]	$312,000
Loss on Redemption of Bonds                [Refer working note]	$28,720
Discount on bonds Payable		$10,000
Cash                                                    [Par value x 106% = $312,000 x 106%]		$330,720
(To record redemption of bonds payable)

.

.

Account Titles and Explanation	Debit	Credit
Cash                                                       [Par value x 106% = $312,000 x 101%]	$315,120
Premium on bonds Payable               [Par value x (101% - 100%)]		$3,120
Bonds Payable                                    [Par value]		$312,000
(To record issuance of new bonds)

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Working Note - Computation of gain (or) loss on early retirement of the bonds
Par value of the bonds	$312,000
Less: Discount on bonds payable	$10,000
Carrying value (or) book value of the bonds	$302,000
Less: Amount paid for redemption                           [Par value x 106% = $312,000 x 106%]	$330,720
Loss on redemption	($28,720)

Note: To redeem the bonds, the company has paid an amount greater than the carrying value of the bonds. So, it incurred loss on redemption