Bond Retirement Journal Entry
Overview
Bond retirement means that the company buys back the bond that it previously sold, either at the maturity date or before the maturity date. Likewise, the company needs to properly make the journal entry for bond retirement as it usually results in gain or loss if the bond is retired before its maturity date.
The company will also need to remove any remaining unamortized balance of discount or premium on bonds payable if it redeems the bond back before its maturity date. In any case, the journal entry of bond retirement will decrease both total assets and total liabilities on the balance sheet of the company.
Bond retirement journal entry
Retirement at the maturity date
When a bond is retired at the maturity date, there is no gain or loss resulting from the retirement of the bond. Likewise, the company can make the journal entry for bond retirement at maturity date by simply debiting the bond payable account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Bonds payable | 000 | |
| Cash | 000 |
Retirement before the maturity date
When the bond is retired before the maturity date, there can be a gain or loss from the retirement. Likewise, the journal entry for the bond retirement with a gain will be different from those with a loss.
The company will make a gain if the net book value of the bond is higher than the cash paid for redemption. On the other hand, the company will make a loss if the net book value of the bond is lower than the cash paid for redemption.
Gain on the retirement of bonds
The company can make the journal entry for the bond retirement with the gain by debiting the bonds payable account and crediting the gain on retirement of bonds and cash account.
| Account | Debit | Credit |
|---|---|---|
| Bonds payable | 000 | |
| Gain on retirement of bonds | 000 | |
| Cash | 000 |
Loss on the retirement of bonds
On the other hand, if the company makes a loss on the retirement of the bonds, it can make the journal entry by debiting the bonds payable and the loss on retirement of bonds account and crediting the cash account:
| Account | Debit | Credit |
|---|---|---|
| Bonds payable | 000 | |
| Loss on retirement of bonds | 000 | |
| Cash | 000 |
Bond retirement example
For example, on May 12, the company ABC makes an early redemption of a bond for $105,000. The company previously issued this bond at the face value of $100,000.
In this case, the company ABC needs to make the journal entry for the bond retirement with a loss of $5,000 as below:
| Account | Debit | Credit |
|---|---|---|
| Bonds payable | 100,000 | |
| Loss on retirement of bonds | 5,000 | |
| Cash | 105,000 |
Retirement of bond discount or premium
There is usually a case where the bond was issued at a discount or a premium. In this case, when the company retires the bond before the maturity date, it needs to also remove the remaining amount of discount or premium on bonds payable as well.
This is due to the discount or premium on bonds payable is usually amortized throughout the bond period. Hence, redeeming the bond early would mean that the discount or premium on bonds payable would have not fully amortized yet.
Example 2 – with remaining discount balance:
For example, assuming the company ABC above makes an early redemption of a bond for $105,000. However, this bond, which its face value was $100,000, was issued at a discount for only $95,000 previously. And currently, there is still a remaining unamortized amount of $2,000 of the discount on bonds payable for this bond on the balance sheet.
In this case, the journal entry for the bond retirement will be as below instead:
| Account | Debit | Credit |
|---|---|---|
| Bonds payable | 100,000 | |
| Loss on retirement of bonds | 7,000 | |
| Discount on bonds payable | 2,000 | |
| Cash | 105,000 |
The $7,000 of the loss on retirement of bonds comes from the cash payment for redemption of $105,000 deducting the net book value of the bond of $98,000 (100,000 – 2,000).
Example 3 – with remaining premium balance:
Another example, let’s assume the company ABC makes an early redemption of a bond for $105,000. However, this bond, which its face value was $100,000, was issued at a premium of $103,000 instead. And, there is still a remaining unamortized amount of $1,000 of the premium on bonds payable.
In this case, the company ABC can make the journal entry for bond retirement which includes the premium on bonds payable as below:
| Account | Debit | Credit |
|---|---|---|
| Bonds payable | 100,000 | |
| Loss on retirement of bonds | 4,000 | |
| Premium on bonds payable | 1,000 | |
| Cash | 105,000 |
The $4,000 of the loss on retirement of bonds comes from the cash payment for redemption of $105,000 deducting the net book value of the bond of $101,000 (100,000 + 1,000).
In short, the company needs to credit the remaining balance of the discount on bonds payable to remove it from the balance sheet as the normal balance of the discount on bonds payable is on the debit side.
On the other hand, it needs to debit the remaining balance of the premium on bonds payable to remove it as its normal balance is on the credit side.
