The accounting for bond retirement is based on the principles of liability. In simple words, if the bond is retired, liability is removed from the books by passing debit entry.
However, there are different treatments for bond retirement treatment. The bond issued by a business or organization has a predetermined maturity date. However, the bond may be converted or redeemed early. The related journal entry depends on whether a bond is retired at maturity, before to maturity, or by conversion.
The article explains how to record the date of bond retirement in a journal. Retirement journal entries might be made at maturity, before maturity, or via a conversion. Before digging into the specifics of bond retirement, it is essential to grasp the fundamental principle.
Also read, Accounting for short term deposit.
What exactly does “Bond Retirement” mean?
The process of returning principal to bondholders is known as “bond retirement.” When this happens, the corporation or organization has to pay off the liability. Consequently, the bonds is removed from the balance sheet.
There are three possible retirement scenarios. Here are few instances:
1-At Maturity, Retirement
When the bond matures, the issuing company must refund the face amount (or par value) to bondholders. Regardless matter whether a bond was issued at a premium or a discount, it’s carrying value will always equal its face value.
By the bond’s maturity date, the principal or par value must be withdrawn from the liabilities account.
Journal Entry for Bond Retirement at Maturity
2-Before maturity, Retirement
Sometimes, a firm may choose to sell all or a portion of its bonds before to maturity. Early redemption of bonds is a synonym for this concept. The substantial fall in market interest contributes significantly to the decision to retire early. As a result, the issuer wants to swap its existing supply of high-interest bonds for the new, lower-interest notes.
There are two ways for bond issuers to dispose of their bonds before the maturity date. These may be acquired on the open market or via the exercise of a call option.
Call option: The issuers must issue callable bonds in order to exercise their option to retire the bonds early if they so choose. Bond issuers of callable bonds have the right to demand bonds from the subscriber for the par value plus a call premium at any time before the bond’s maturity.
Open market: In order to retire bonds early, issuers may repurchase them on the open market. In the event of an open market buyback of bonds, issuers must pay the current market value of the bonds.
If issuers repurchase bonds on the open market or retire them early via the exercise of a call option, they will not necessarily pay the exact carrying value of the bonds. Bondholders are entitled to repayment at a cost equal to the premium plus the bonds’ carrying value. Whether there was a gain or loss upon retirement is determined by the difference between the carrying value and the repurchase price. This profit or loss is shown on the income statement.
Journal entry for bond retirement before maturity
|Premium on bonds payable
|Gain on bond retirement
3-Bond Retirement by Conversion
This position may lead to retirement. This happens when a company offers bonds with the option to convert into common stock.
Journal entry for bond retirement by conversion
Upon conversion, the carrying value of the bonds is moved to the equity account and no gain or loss is shown on the income statement.
By retiring bonds, issuers are released from their responsibility to make bond payments. Retirement occurs at maturity, early retirement occurs by the exercise of call options or open-market repurchases, and conversion retirement occurs. Depending on the kind of retirement being reported, several journal entries are generated.
Further, read on investopedia.