Final answer:
Barlow Company would report a $38,700 loss on its 2015 income statement upon redemption of its bonds. The loss is calculated by comparing the adjusted carrying amount of the bonds after two years of amortization to the call price.
Step-by-step explanation:
To determine whether Barlow Company would report a gain or loss upon the redemption of its bonds, we need to calculate the carrying amount of the bonds on January 1st, 2015, and compare it to the redemption price of the bonds.
The bonds had a face value of $450,000 and were issued for $415,500 which means they were issued at a discount of $34,500 ($450,000 - $415,500). The straight-line method of amortization spreads this discount equally over the life of the bonds, which is 5 years. Thus, annual amortization is $6,900 ($34,500 / 5 years).
Since the bonds were redeemed on January 1st, 2015, we would amortize the discount for two years (2013 and 2014):
- Total amortization over two years: $6,900 x 2 = $13,800
Adjusted carrying amount of the bonds on January 1st, 2015 is:
- Initial proceeds: $415,500
- + Total amortization: $13,800
- = Adjusted carrying amount: $429,300
The bonds' call price is 104, which means 104% of the face value:
- Call price: $450,000 x 104% = $468,000
Finally, to determine the gain or loss:
- Call price: $468,000
- - Adjusted carrying amount: $429,300
- = Loss on redemption: $38,700
Therefore, the Barlow Company would report a $38,700 loss on its 2015 income statement.