Why would a company wish to reduce its bond indebtedness before its bonds reach maturity?
Indicate how this can be done and the correct accounting treatment for such a transaction.
It is sometimes desirable to reduce bond indebtedness in order to take advantage of lower prevailing interest rates. Also, the company may not want to make a very large cash outlay all at once when the bonds mature.
Bond indebtedness may be reduced by either issuing bonds callable after a certain date and then calling some or all of them, or by purchasing bonds on the open market and then retiring them.
When a portion of bonds outstanding is going to be retired, it is necessary for the accountant to make sure any corresponding discount or premium is properly amortized. When the bonds are extinguished, any gain or loss should be reported in income.
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