Question

Exercise 14-12 On January 2, 2012, Metlock Corporation issued $1,250,000 of 10% bonds at 97 due December 31, 2021. Interest on the bonds is payable annually each December 31. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable "interest method".) The bonds are callable at 102 (i.e., at 102% of face amount), and on January 2, 2017, Metlock called $750,000 face amount of the bonds and redeemed them. Ignoring income taxes, compute the amount of loss, if any, to be recognized by Metlock as a result of retiring the $750,000 of bonds in 2017. (Round answer to 0 decimal places, e.g. 38,548.)

Answer 1

the loss on the call was for 26,250

Step-by-step explanation:

TO know the gain or loss, we will compare the call value with the book value

call value = face value x call points

750,000 x 102/100 = 765,000 call

then book value, will be face value less carrying value of discount

face value:

discount 750,000 x 3% = 22,500

amortization on discount:

22,500/10 = 2,250 per year x 5 years to 2016 from 2012 = 11,250

discount at Jan 2th, 2017 22,500 - 11,250 = 11,250

book value 750,000 - 11,250 discount = 738,750

book value 738,750

call value (765,000)

loss (26,250)