Question

On June 30, 2014, Baker Co. Had outstanding 8%, $6,000,000 face amount, 15-year bonds maturing on June 30, 2024. Interest if payable on June 30 and Dec 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2014 were $210,000 and $60,000 respectively. On June 30, 2014, Baker acquired all off tees bonds at 94 and retired them. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt?

Answer 1

To compute the gain or loss on the early extinguishment of debt, subtract the unamortized discount and deferred bond issue costs from the face amount of the bonds. The net carrying amount that should be used in computing the gain or loss on the early extinguishment of debt is $5,730,000.

Step-by-step explanation:

When a bond is retired or extinguished before its maturity, the gain or loss on this early extinguishment of debt is calculated by comparing the net carrying amount of the bond with the amount paid to retire the bond. In this case, to calculate the net carrying amount, we need to subtract the unamortized discount and deferred bond issue costs from the face amount of the bonds. The net carrying amount is calculated as follows:

1. Face amount of the bonds: $6,000,000
2. Unamortized discount: $210,000
3. Deferred bond issue costs: $60,000

Net carrying amount = Face amount - Unamortized discount - Deferred bond issue costs

Net carrying amount = $6,000,000 - $210,000 - $60,000

Net carrying amount = $5,730,000

So, the net carrying amount that should be used in computing the gain or loss on the early extinguishment of debt is $5,730,000.