Bond Redemption – MCQ

Practice Question

Intro to Financial Accounting
Non-Current Liabilities
Bond Redemption Accounting
MCQs

If a company buys back 20% of its bonds for cash at 102, how would the journal entry reflect this transaction?

  1. Credit Bonds Payable for 20%, Credit Cash for 98%, and Credit Gain on Redemption for 2%
  2. Debit Bonds Payable for 20%, Credit Cash for 102%, and Debit Loss on Redemption for 2%
  3. Credit Bonds Payable for 20%, Debit Cash for 102%, and Credit Loss on Redemption for 2%
  4. Debit Cash for 102%, Credit Bonds Payable for 20%, and Debit Gain on Redemption for 2%
Answer +
Correct Answer: B
Explanation +

The company is redeeming 20% of its outstanding bonds at 102, which is 2% above face value. This results in a loss.

The journal entry would include:

  • Debit Bonds Payable for 20% of face value
  • Credit Cash for 102% of that portion
  • Debit Loss on Redemption for the 2% premium paid

Properly recording bond redemptions is essential for reflecting financial performance and obligations accurately.