A bond is a type of debt instrument that a company uses to borrow money. A bondholder pays money to a company to receive a bond, and the company in turn pays the bondholder periodic interest payments and repays the bondholder on the bond’s maturity date. Some bonds allow you to repay or retire the bonds before the maturity date. If your company retires its bonds before their maturity date, you must calculate a gain or loss on the retired bonds and report the amount on your income statement.
Determine from your accounting records the balance of your bonds payable account, which is the amount you would have had to pay on the bonds’ maturity date had you not retired them. For example, assume your bonds payable account balance is $10,000.
Determine either the unamortized amount of bond premium or the unamortized amount of bond discount from your accounting records. A bond premium or discount is the amount bondholders either overpaid or underpaid, respectively, depending on market interest rates, to initially buy the bonds. The unamortized amount is the amount that is still in your accounting records. In the example, assume you have $1,500 in unamortized bond premium.
Add the unamortized amount of bond premium to your bonds payable balance to calculate the bonds’ net carrying value. Alternatively, subtract the unamortized amount of bond discount from your bonds payable balance to calculate the bonds’ net carrying value. In the example, add $1,500 in unamortized bond premium to your $10,000 bonds payable balance to get an $11,500 net carrying value.
Subtract the total amount you paid to retire the bonds from the bonds’ net carrying value. A positive result represents a gain, while a negative result represents a loss. In the example, if you paid $10,500 to retire the bonds, subtract $10,500 from the bonds’ $11,500 net carrying value to get $1,000. This represents a gain of $1,000 on the retired bonds.
Write “Gain on retired bonds” and the amount of the gain on your income statement to report a gain. Alternatively, write “Loss on retired bonds” and the amount of the loss in parentheses to report a loss. In the example, write “Gain on retired bonds $1,000” on your income statement.