# Gain or Loss on Early Retirement of Bonds

A bond is said to be retired early when either the issuer or bondholder redeems the bond in exchange of cash before its original maturity date. It often results in a gain or loss because in many cases, redemption/retirement value is different from the carrying amount.

Accounting for bonds retired at their original maturity is straight forward. There is no gain or loss because the maturity value (the cash paid by the issuer) is exactly equal to the carrying amount of the bond on the statement of financial position.

When a bond is retired before maturity, the price may not be exactly equal to the carrying amount. If the price paid to retire a bond is greater than the carrying amount of bonds, the issuer recognizes a loss on retirement. But if the price paid is less than the carrying amount of the bonds at retirement, the issuer records a gain on retirement of bonds.

Bonds are often retired when they contain call options. Such bonds specify a call price which most often varies depending on when the bond is called.

## Example: loss on retirement of bonds

Company L issued bonds with a face value of \$100,000 two 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. Let’s see how this is accounted for.

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. Hence, the carrying amount is \$96,000. As the cash paid to redeem the bonds (\$98,000) exceeds the carrying amount (\$96,000) by \$2,000, the company must bear a loss of \$2,000 on retirement. It recognizes the loss using the following journal entry:

 Bonds payable 100,000 Loss on retirement of bonds 2,000 Cash 98,000 Discount of bonds 4,000

## Example: gain on retirement of bonds

Company G issued bonds with a face value of \$100,000 two years ago at a premium of \$6,000. The current balance in the premium on bonds payable account is \$5,000. The company intends to redeem the bonds for \$102,000.

In this case, the face value of the bonds payable is \$100,000 and the outstanding balance of premium on bonds payable is \$5,000. Hence, the carrying amount is \$105,000 (\$100,000 plus \$5,000). As the cash paid to redeem the bonds (\$102,000) is lower than the carrying amount of the bonds (\$105,000), there is a gain on retirement. This is because the company was able to settle the liability for less than its carrying amount.

Company G should record the gain on early retirement of bonds of \$3,000 using the following journal entry:

 Bonds payable 100,000 Premium on bonds 5,000 Cash 102,000 Gain on retirement of bonds 3,000