 In this presentation, we will discuss the journal entries related to the retirement of Bonds. The retirement of bonds just means that we are going to pay off the bonds in some form or another at some time or another, meaning the bonds are going to go away. That will happen at the maturity date at the end of the bond. So for example, if we had a bond on these terms with the face amount of 240, the issue price of 198, 484, 15 year bonds, they're going to be semi-annual. What would happen is when we put this on the books, we would put it on the books as cash we got for the 198, the bond payable on the books for 240, and then a discount. And then of course, over the life of the bond, we would be paying interest for that 15 year time period two times, that's 30 payments. And then at the end of this, we would also be amortizing out the discount to get rid of it, to make it go away to the interest. And then by the end of this time period, the discount would be zero, and we would only be left with the bond on the books. In other words, at the maturity date, we would have something like this on our trial balance. The discount is now zero, and the bond is on the books at 240, which is the face amount of the bond. If it were a premium, it would be the same in that we would be left with just the bond amount, and the premium would be gone to zero. And now it's just like anything else, that we don't have to deal with interest at this point or anything else, we just need to close out the bond. And so it's just like any other liability we're just going to pay at the maturity date, that's how we're going to retire it. So this is a 240 credit, we're going to make it go down by doing the opposite thing to it at debit, and we're going to pay cash. Cash is a debit balance, we need to make it go down. So we're going to credit cash. So this is going to be our journal entry, we'll debit the bond to make it go away, and then we'll pay off the cash. When we post this, then the bond payable will be here, it's a credit, we're going to debit it, making it go away to zero. And then the cash has a debit balance, we're going to credit it, making the cash go down. So it's a pretty straightforward journal entry. The only confusing thing about this journal entry is that it happens at the end of the bond term, so when we're talking about book questions, we often don't get asked it because usually we're concentrating on how to calculate the interest, how to calculate the face amount of the bond, how to record the bond, how to amortize the bond discount or premium. And we don't really typically get all the way to the end of the bond, the retirement, the maturity date to record the end transaction often times. And it's a pretty easy transaction if we were to do so, and it's a lot easier too if we can actually see the trial balance. When you see the trial balance, you say, oh, there's a liability there. We're going to pay it, just like we would if it were note payable at this time. It needs to go down, and then we're going to pay it off with cash. Now it is possible for us to have a callable bond that we're going to retire before the end of the bond date, before the maturity date. So in other words, in this case, we have the bond on the books of 240,000, and we have the discount of 38,748. And therefore, if we were to calculate the carrying amount, we'd have 240,000 minus the 38,748 or 201,252. This 201,252 is the carrying amount of this bond payable. This is something that we owe in the future. If we can pay it off at this point in time for some cash that's going to be less than this amount, then we're going to have a gain resulting in a gain. And if we are paying it off early for something more than this, we're going to have a loss. So let's see what that's going to look like. The gain or loss can be confusing here when we're talking about a bond. It's easier to get to that point by just doing the journal entry. So if we have all this information, especially if we have the trial balance, because then we can see what accounts are debited and credited on the trial balance, or which accounts have a debit or credit balance, then it's a lot easier for us to construct the journal entry. So the first is going to be given to us. We're going to say that the cash that we're paying is 230,000. That's going to have to just be given in the problem, because that's the callable price. That's how much we're able to purchase these bonds for. So cash is going to go down, because remember we are buying them back, basically, or we're paying them off early before the maturity date. So it's going to be 230. Then we're going to say that the bond payable has to go off the books. Now the bond payables on the books at 240,000, we can see it's a liability. It has a credit balance. So to take it off the books, we do the opposite thing to it, a debit, or whatever it needs to be to make it go to zero. The discount, same thing. We need to do whatever we need to do to make it go to zero, because it's got to go away. So when we construct the journal entry, we just know that we just got to do whatever we need to do to make it go to zero. If you have a trial balance in front of you, that's easy to do, because we can see the discounts on the books at a debit, and we need to do the opposite to make it go down, which is a credit. If you're looking at a book problem that doesn't give you a trial balance and just tells you that the bond is on the books at a discount, then you got to think through it. And one way to think through it might be to say, well, the bonds is a liability. It must be a credit. The discount means that we're making the bond go down, because it must be decreasing. We're having it less than the face amount, the sticker price. And since it's a credit, the thing that makes a credit go down would be a debit. So the discount must be a debit, because these two are really combined together. And a discount means that we really, the net of the two are below the face amount price. So this must be a debit. So if it were a premium, then this amount must be increasing or greater than the face amount, and it would be a credit normal balance. Once we know that this is a debit normal balance for a discount, then we can do the opposite thing to it, credit it to make it go down. And then, of course, we just need to figure out what the difference is. We've got credits of 230,000 and 38,748 minus the 240 debit, means we need a 28,748 debit. And that, of course, in this case, I'm going to say it's a gain loss account here, because it could have gone either way. But if it's a debit here, then it's on the income statement. That's going to be a loss. And you just got to basically start to be able to recognize that. Why would that be a loss? Well, you can think through that we paid 230 versus the carrying value. Or you can also just think, well, if it's a debit on the income statement, it's acting more like an expense, meaning expenses have debit balances. They go up in the debit direction and they bring net income down. Revenue has a credit balance. It brings net income up. This is acting like an expense, because it's a debit balance. If we debit the income statement, it's going to make net income go down. That means it must be a loss rather than a gain, which we would think would make net income go up. So the other way we can think about this is to remember the carrying value is going to be the 240,000 minus the 38,748. So this is kind of the value that we owe on the bond. And it's a liability. That's kind of the value we owe. And we paid more than the value that we owe. So that's going to be a loss in this case. And that's another way you can think through it being a loss. So if we post this out, then we're going to say that the gain or loss, 28,748 is here, making the income statement account go up, kind of like an expense, bringing net income down. The bond payable will be posted here. It's going to make the bond payable go to zero. That's why we are retiring it, making it go away. And then we've got the discount. It's going to make the discount go to zero because we're retiring it as well. And then the cash is going to be here. Cash is going to go down. So there's going to be our transaction. We have the bond payable and discount gone away, which has to be the case if we're retiring the bonds. The cash is going down for the early retirement. And we resulted in a loss in order for us to be able to retire the bonds early.