Gain or Loss on Early Retirement of Bonds

A bond is said to be retired early when it is retired at any time before its maturity date.

Accounting for bonds retired at maturity is straight forward: the company pays out cash and removes the bond payable from its balance sheet. However, when a bond is retired before maturity a gain or loss may arise. If the price paid to retire the bonds is greater the carrying amount of bonds the company needs to record a loss on retirement. On the other hand if the price paid is less than the carrying amount of the bonds at retirement the company records a gain on retirement of bonds.

Example: loss on retirement of bonds

Company L had issued $100,000 worth of bonds 2 years ago at a discount of $5,000. The current balance in the discount on bonds payable account is $4,000. The company intends to redeem the bonds for $98,000.

Carrying amount of a bond payable equals the face value of the bond less any discount or plus any premium. In this scenario the face value is $100,000 and the outstanding balance of discount on bonds payable is $4,000 which gives us a carrying amount of $96,000. Since the cash paid to redeem the bonds is $98,000 which exceeds the carrying amount of $96,000 by $2,000 the company needs to record loss of retirement of bonds of $2,000 as follows:

Bonds payable100,000
Loss on retirement of bonds2,000
Cash98,000
Discount of bonds4,000

Example: gain on retirement of bonds

Company G had issued $100,000 worth of bonds 2 years ago at a premium of $6,000. The current balance in the discount on bonds payable account is $5,000. The company intends to redeem the bonds for $102,000.

Carrying amount of a bond payable equals the face value of the bond less any discount or plus any premium. In this scenario the face value is $100,000 and the outstanding balance of premium on bonds payable is $5,000 which gives us a carrying amount of $105,000 ($100,000 plus $5,000). The cash paid to redeem the bonds is $102,000 which is lower than the carrying amount of $105,000. Company G should record a gain on early retirement of bonds of $3,000 because it was able to settle a liability for less than its carrying amount.

Bonds payable100,000
Premium on bonds5,000
Cash102,000
Gain on retirement of bonds3,000

Written by Obaidullah Jan, ACA, CFA <--- Hire me on Upwork