Bond Early Redemption
A callable bond is a bond that can be retired before its maturity date. Companies often retire bonds early when they have extra cash and wish to reduce their debt or if market interest rates change and they wish to capitalize on it.
The Callable Rate
- Represents the cash needed to retire the bond.
- Percentage of the face value that is being retired.
Journalizing Early Redemption
- Debit: Bonds payable by the portion of the face value being redeemed.
- Credit: Cash for the bond payable amount multiplied by the callable rate.
- Debit/Credit: Premium or discount by the a portion of the unamortized balance (same portion as bond payable being redeemed)
- Debit/Credit: Loss or Gain.
- If cash paid is greater than the carrying value of the bond: ________ on early redemption
- If cash paid less than the carrying value of the bond: ________ on early redemption
Example: Early Redemption of Bonds
ABC Inc. issued a 5-year semi-annual bond with a coupon rate of 10% and a face value of $100,000. The market rate at issuance was 8% and the company's fiscal year ends on December 31. The bond is callable at 103.
Prepare the journal entry to record the early redemption of 30% of the bonds on February 1st, 2022.
Example: Early Redemption of Bonds
United Airlines issued bonds with a face value of $250,000 and a coupon rate of 5%, coupons are paid semi-annually. The bonds mature in 10 years and at the time of issuance the market rate was 7%.
The company retires 45% of the bonds on September 1st, 2021 immediately after paying the coupon. Prepare the journal entry to record the redemption. The bonds are callable at 98.