 and welcome to this session in which we would look at bond retirement or bond extinguishment. Why is this topic important and what's the big idea here? Well, if companies wait until the bond matures, if we wait till maturity, we will receive the face value. It's pretty straightforward. We saw in the prior session whether we have a premium bond or a discount bond at maturity when we pay back the bond, when we buy back the bond from the holder, we pay the face value. So there is nothing to it. Well, what happens if we purchase the bond before maturity? Now, hold on a second. Why would the company buy the bond before maturity? Well, we could have many reasons why. One is the credit risk for that company that improved over time. So for example, when you issued this bond five years ago, the credit risk of the company was triple B. Now, the credit risk of the company is maybe double B or even B. So the credit risk increased. Maybe when we issued those bonds, because of our credit risk, we were paying 10%. Now we can issue the bond at 6%. So we might buy them and issue them at 6%. That's one reason. Another reason could be the overall interest rate went down. Same story. The overall interest rate was higher when we issued those bonds. Now it's lower. Let's buy back the bond or we just simply, we don't need the money anymore. Now we have plenty of cash, so we want to avoid making cash payments. Well, it doesn't matter what the reason is. It could be for any reason. Simply, the company will buy back their bond. Now, what matters is you want to know what's the carrying value of the bond when you buy it back. And this is where we end up in the prior session. In the prior session, we summarized on the slide and we said that eventually the bond is back to the face value of weight till maturity. Well, that doesn't apply here, because we're buying the bond before maturity. What matters is how do you find the carrying value of the bond? Well, we're always going to use the face value if it's a discount bond and we're going to deduct from the face value any unamortized discount. For a premium bond, we're going to take the face value and add to it any unamortized premium. And I explained this much, much more in the tales in the prior session, including showing you in the schedule how the bond carrying value is changing, whether it's a discount bond, it's going up, if it's a premium bond, it's going down. So now, in this session, we're going to use this information and determine when do we have a gain and when do we have a bond. Well, here's what's going to happen. When we buy back the bond, if the proceeds that we pay is greater than the carrying value, we have a loss. Simply put, if we pay $90 for a bond carrying value of $80, we have a loss of 10. If we, if what we paid $90, the carrying value is 95, we have a gain of five. So notice what matters are two things for gains and losses, what you paid versus the carrying value. No role this count or premium plays in the gain loss computation. Yes, they play a role in the carrying amount of the bond, but you don't take them into account when you are determining the gain or the loss because some students, what they do, they always assume if it's a discount bond, it must be a gain, or if it's a discount bond, it must be a loss. Not necessary, same thing with the premium bond. What matters is what you pay versus the book value, the carrying value of the bond. Now, the best way to illustrate this is to actually work an example, including journal entries. Whether you are an accounting student or a CPA candidate, I invite you to look at my website, farhatlectures.com. I don't replace your CPA review course or your accounting course. On the contrary, I'm a useful addition, a useful resource to your study. You can add me to your study tool, you can add me as a resource. I explain the material differently, I'll go a little bit more in-depth than your maybe your course or your CPA review course. Your risk is one month of subscription. Your potential gain is actually passing the exam. If not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. This is a list of all the accounting courses that I offer, including lectures, multiple choice through false, and many other resources. My CPA resources are aligned with your Becker, Roger, Gleam, and Wiley. And I also give you access to 1500 previously AI CPA released questions with detailed solution. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation, like this recording, share it with other, connect with me on Instagram, Facebook, Twitter, and Reddit. So let's take a look at this example. On January 1st, X1, Adam Company issued at 96 at a discount bond with a par value of a million due in 20 years. Four years later, after the issue date, Adam buys, which calls the entire issue at 98 and retire and retire it. So they retired it four years later. At that time, the N-amortized discount is 32,000. Well, what do we have to know? First, you have to know, what did you pay for it? Well, it's easy. We paid for the bond. It's a million dollar bond. We paid 98 percent. We paid 980,000. This is what we paid. Excellent. Now, what was the carrying value of the bond? Now, this is easy because I am giving the N-amortized discount. Sometime I may tell you, or the exam might say, you purchased it after four years, so you have to compute the discount. Well, we don't have to do that now. If we have a million dollar minus the 32,000 N-amortized discount, the bond book value is 968. Hold on a second. Book value 968. We paid 980. We are at a loss. The difference is a loss. Simply put, we paid 980,000. This is the reacquisition price, or the proceeds that we paid the cash. The carrying value is 968, which is the face value minus the N-amortized discount. We have a loss. Now, you have to book the journal entry for the loss. How would you start with the journal entry? If you are on the CPA exam, start with the easy part. You know that you have to get rid of the bond. Debit the bond spable for a million dollars. You know you need to get rid of the discount. Discount is 32, so first I will do this entry, then I will do this entry, because I need to get rid of the bond regardless. I know I incur the loss of 12,000, and I know I paid cash 980,000. This is the entry. Now, let me change the example a little bit. Now, you might be saying, oh yes, it's going to be a loss because it's a discount bond. Not necessary. Let's assume I paid for this bond for the sake of illustration I paid for this bond 96.2 or 96.1. So I paid for this bond. I'm sorry, it was issued at 96. Yes, I paid for it to retire it 96.1%. Let's do the computation now. If I paid that price, it means I'm going to pay 900 and 61,000. Well, if I paid 961,000, it has a book value of 968, I have a gain of $7,000. Well, what changes with the entry? This does not change, and this does not change. I have to retire the bond. I have to retire the discount with that bond, because the discount is a contra payable. It comes with the bond. Now, obviously the cash will change 961, and I no longer have a loss. Now I have a gain, and the gain is, how much is the gain? The gain is 7,000. Remember the gain is a credit of 7,000. So if we take, make sure your debit's equal to your credit, 961 plus 7,000 credit is 968 plus 32 is a million, and we have a debit a million. Therefore notice I turn this into a gain, although it's a discount bond. It doesn't matter. What matters is what you pay. What matters for the gain or the loss is what you paid versus the book value. What should you do now to learn more about this topic? Go to my website farhatlectures.com and start to work additional multiple choice. Look at additional resources for this material. At the end of this recording, I'm going to remind you whether you are a student or a CPA candidate to take a look at farhatlectures.com. Your accounting career, your CPA certification is important for you. Invest. Don't take any chances. Throw everything at it. I can help you pass the CPA exam. Don't shortchange yourself. Once you have your exam, once you have your certification, it's for a lifetime. Good luck, study hard, and of course, stay safe.