Journal entry for Repurchase of Debt
Repurchase of debt is the business transaction that company repurchases the debt (bonds) from the capital market.
Bonds payable is an accounting term that refers to the amount of money a company owes to bondholders. This debt may be in the form of bonds, notes, or other debt instruments. Bondholders are typically institutional investors, such as banks or insurance companies, that lend money to companies in exchange for interest payments.
The interest payments on bonds are typically fixed, which means that the company’s payments will not change over time even if market conditions do. Companies typically issue bonds when they need to raise capital for expansion or other investments. When a company makes bond payments, it is important to record them as an expense in the accounting records. This will ensure that the company’s financial statements accurately reflect its financial position and performance.
The company issue bonds to borrow cash from the investors and promise to pay back both principal and interest. A bond is a type of loan that a company takes out in order to raise capital. When a company sells bonds, it is essentially borrowing money from the bondholders and promising to pay them back over time, with interest. This can be an attractive option for companies because it provides them with the cash they need without giving up equity in their business.
A company may buy back its bonds payable for a number of reasons. For instance, if interest rates have fallen since the bonds were originally issued, the company can save money by buying back the bonds and re-issuing new debt at a lower rate. Alternatively, if the company has excess cash on hand, it may elect to buy back some of its bonds as a way to return money to shareholders. Finally, if the company is planning to be acquired or go public, it may buy back its bonds as part of an overall strategy to reduce debt. Regardless of the reason, when a company buys back its bonds payable, it typically results in a reduction of interest expense going forward.
The buyback of bonds or debt will remove it from the company’s balance sheet. If the bonds are issued at a premium or discount, they will be removed as well.
Journal Entry for Repurchase of Debt
The company buyback the bonds from the capital market, it needs to pay the cash base on the market value of the bonds. The bonds payable are recorded as the long-term liability on the company balance sheet. Its carrying amount may be different from the market price which leads to the gain or loss on bonds repurchase.
The journal entry is debiting bonds payable and credit cash paid.
| Account | Debit | Credit |
|---|---|---|
| Bonds Payable | 000 | |
| Cash | 000 |
If the bonds market value is different from the carrying amount, it will generate a gain or loss on the income statement.
If the carrying amount is less than the market value, it will generate a gain. The journal entry is debiting Bonds Payable and credit Cash and Gain on bond repurchase. It means the company pays cash less than the liability which is settled.
| Account | Debit | Credit |
|---|---|---|
| Bonds Payable | 000 | |
| Cash | 000 | |
| Gain on Bonds Retirement | 000 |
If the carrying amount is more than the market value, it will generate a loss. The journal entry is debiting bonds payable, Loss on bonds retirement, and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Bonds Payable | 000 | |
| Loss on Bonds Retirement | 000 | |
| Cash | 000 |
Bonds issued at a premium
When the company issue bonds at a premium, it will record two liabilities accounts which are the Bonds payable and the Premium on Bonds Payable. The premium on bonds payable supposes to reverse each year to zero on the maturity date.
When the company purchases the bonds back from the market, it needs to reverse both liabilities accounts (Bonds & Premium). The journal entry is debit bonds payable, Premium on Bonds Payable, and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Bonds Payable | 000 | |
| Premium on Bonds Payable | 000 | |
| Cash | 000 |
Bonds issued at a discount
Opposite from bonds premium the company will require to record assets account (discount on bonds payable) when it issues the bonds at discount. This account will be amortized over the bond’s life and reach zero at the maturity date.
When company repurchases the bonds, it has to reverse both bonds payable and discount on bonds payable. The journal entry is debiting Bonds Payable and credit Cash, Discount on bonds payable.
| Account | Debit | Credit |
|---|---|---|
| Bonds Payable | 000 | |
| Discount on Bonds Payable | 000 | |
| Cash | 000 |
Example
Company ABC is purchasing the bonds back from the capital market. The bonds are trading at $ 1,150 each on the market. On the balance sheet date, the carrying amount is 1,000 and the premium on bonds payable is $ 50 each. The company decided to repurchase the 1,000 bonds from the market. Please prepare a journal entry for the repurchase of bonds.
The company has bonds payable balance $ 1,000 and a Premium on bonds payable $ 50 on the balance sheet. The total liabilities accounts is $ 1,050. However, the company needs to spend $ 1,150 to pay off both liabilities accounts. So it is a loss of $ 100 ($ 1,150 – $ 1,050).
The company has repurchased the 1,000 bonds from the market, The journal entry is:
| Account | Debit | Credit |
|---|---|---|
| Bonds Payable | 1,000,000 | |
| Premium on Bonds Payable | 50,000 | |
| Loss on bonds retirement | 100,000 | |
| Cash | 1,150,000 |
