The bond indenture may contain a provision stating that the corporation may pay up a bond before its maturity at a specified price. This is called an early retirement of the bond. If the price paid is greater than the book value of the bond, the difference is a loss. If it is less than the book value, the difference is a gain. 

Neither losses nor gains are to be considered extraordinary. The book value of a bond is equal to the balance in the bonds payable account minus any discount, plus any premium. It is important to make sure that the discount or premium account has been amortized right up to the retirement date.

The journal entry for a retirement closes the bonds payable account and the related discount or premium, credits cash, and recognizes the gain or loss.

On January 1, 19X1 Knowledgiate Corporation issued a $100,000 bond (5-year life) at 103. After 2 years it retired the bond at 104 (as specified in the indenture). At this point, the bond accounting appear as follows:

The book value is thus $101,800 ($100,000 + $1,800). Since the retirement price is $104,000 (1.04 × $100,000), the difference of $2,200 is a loss. 
The journal entry is:

Bonds Payable           100,000
Bond Premium               1,800
Loss on Retirement       2,200
Cash                                          104,000

If there is an unamortized bond issue cost relating to the bond, it should be written off at this point, thus enlarging the loss, or in a gain situation, reducing the gain.

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