Journal entry to record redemption of bonds

Introduction

When the bonds reach their stated maturity date, we need to make the redemption of bonds by repurchasing the bonds back from the bondholders. In this case, we need to make the journal entry to record the redemption of bonds in order to remove the bonds payable from the balance sheet.

However, sometimes, we may decide to make the redemption of bonds before their maturity date which results in a gain or loss for the redemption. If this is the case, we also need to record the gain or loss on the income statement as a result of the redemption of bonds before maturity.

Additionally, if the bond issued is a discounted bond or a premium bond, we also need to remove the unamortized bond discount or the unamortized bond premium from the balance sheet. This is because the redemption of bonds before maturity means that the bond discount or bond premium will have not been fully amortized yet at the time of the redemption.

Journal entry to record redemption of bonds at maturity

We can make the journal entry to record the redemption of bonds at maturity by debiting the bonds payable account and crediting the cash account.

Account Debit Credit
Bonds payable $$$
Cash $$$

This journal entry for the redemption of bonds will decrease both total assets (credit cash) and total liabilities (debit bonds payable) on the balance sheet by the same amount.

For example, on January 1, we redeem the $500,000 bonds at the end of their maturity by making the $500,000 cash payment to the bondholders.

In this case, we can make the journal entry to record the redemption of the $500,000 bonds at their maturity date by debiting the $500,000 amount to the bonds payable account and crediting the same amount to the cash account.

Account Debit Credit
Bonds payable 500,000
Cash 500,000

This journal entry will remove the $500,000 bonds payable from the balance sheet. Hence, this journal entry will decrease both total assets and total liabilities on the balance sheet by $500,000.

Journal entry to record redemption of bonds before maturity

As mentioned, there may be a gain or a loss as a result of the redemption of the bonds before the maturity date. In this case, we can determine the gain or the loss on redemption of bonds by comparing the price we pay to repurchase the bonds back with the carrying value of bonds payable on the balance sheet as at the time of redemption.

We will have a gain on the redemption of bonds if the price of repurchasing back the bonds is less than the carrying value of the bonds payable. On the other hand, if the price we pay is higher than the carrying value of the bonds, we will have a loss on the redemption of bonds instead.

Gain on redemption of bonds

We can make the journal entry to record the gain on redemption of bonds before maturity by debiting the bonds payable account and crediting the cash account and the gain on redemption of bonds account for bonds issued at face value.

Redemption of bonds issued at face value:

Account Debit Credit
Bonds payable $$$
Cash $$$
Gain on redemption of bonds $$$

In this journal entry, the gain on redemption of bonds is a difference between the cash payment we make to purchase the bonds back and the carrying value of bonds payable which in this case is the bonds payable itself. This is the case for the bond issued at face value.

However, if we issued the bonds at a discount, the carrying value of bonds payable at the redemption date will be the balance of the bonds payable less the remaining unamortized balance of the bond discount.

Carrying value of bonds payable on the balance sheet
Bonds payable $$$
Less: bond discount ($$$)
Carrying value of bonds payable $$$

In this case, the journal entry to record the gain on redemption of bonds before maturity will include the credit of the bond discount as below:

Redemption of bonds issued at a discount:

Account Debit Credit
Bonds payable $$$
Bond discount $$$
Cash $$$
Gain on redemption of bonds $$$

The credit of the bond discount account in this journal entry is to remove the remaining unamortized amount of bond discount from the balance sheet. This is because when we redeem the bond before its maturity, the bond discount will have not been fully amortized yet.

Alternatively, if we issued the bonds at a premium, the carrying value of bonds payable will be the balance of the bonds payable plus the remaining unamortized balance of the bond premium.

Carrying value of bonds payable on the balance sheet
Bonds payable $$$
Add: bond premium $$$
Carrying value of bonds payable $$$

In this case, the journal entry for the redemption of bonds before maturity will include the debit of the bond premium account as below:

Redemption of bonds issued at a premium:

Account Debit Credit
Bonds payable $$$
Bond premium $$$
Cash $$$
Gain on redemption of bonds $$$

In this journal entry, we credit the bond premium account to remove it from the balance sheet as it will have not been fully amortized yet for the redemption of bonds before the maturity date.

Loss on redemption of bonds

On the other hand, if we have a loss on redemption of bonds instead, we can make the journal entry to record the loss to the income statement with the debit of the loss on redemption of bonds account.

Likewise, the journal entry to record the loss on redemption of bonds will be as below:

Redemption of bonds issued at face value:

Account Debit Credit
Bonds payable $$$
Loss on redemption of bonds $$$
Cash $$$

Redemption of bonds issued at a discount:

Account Debit Credit
Bonds payable $$$
Loss on redemption of bonds $$$
Bond discount $$$
Cash $$$

Redemption of bonds issued at a premium:

Account Debit Credit
Bonds payable $$$
Bond premium $$$
Loss on redemption of bonds $$$
Cash $$$

Redemption of bonds before maturity example

For example, we issued $200,000, five-year, 6% bonds for $190,000 which was 95% of their face value. The interest was payable annually at the end of each year.

However, after paying the interest at the end of the fourth year, we decide to make the cash payment of $195,000 to repurchase these $200,000 bonds back. And at this time, there is $2,000 of the unamortized amount of bond discount remaining on the balance sheet.

What is the journal entry to record the redemption of the $200,000 bonds before their maturity?

Solution:

As there is a $2,000 unamortized amount of the bond discount, we can determine the carrying value of bonds payable to be $198,000 ($200,000 – $2,000) at the time of bond redemption.

In this case, there will be a gain of $3,000 ($198,000 – $195,000) on the redemption of bonds as we only pay $195,000 to repurchase the bonds that have a $198,000 carrying value on the balance sheet.

Hence, we can make the journal entry to record the $3,000 gain on redemption of bonds before maturity as below:

Account Debit Credit
Bonds payable 200,000
Bond discount 2,000
Cash 195,000
Gain on redemption of bonds 3,000