Question

Because of changing market conditions, Friendly Corporation made the decision to redeem $300,000 of its bonds prior to maturity. The bonds had been issued at a discount and the balance in the discount account at the time of redemption was $15,000. The corporation's bond certificates indicated that the bonds could be retired early at 103. Friendly's retirement of the bonds would result in a(n)

a. gain of $6,000.
b. loss of $24,000.
c. increase in assets of $15,000.
d. decrease in owners' equity of $9,000.

Answer 1

Friendly Corporation incurred a loss of $24,000 from the early redemption of bonds due to the difference between the redemption price and the carrying amount of the bonds. The redemption price was higher than the carrying amount, leading to this financial loss.Thus the correct option is b.

Step-by-step explanation:

When Friendly Corporation made the decision to redeem its bonds early, they faced certain costs which resulted in financial consequences. The bonds were redeemed at 103, meaning for every $100 of face value, the company had to pay $103. With $300,000 of bonds redeemed, the total redemption cost was $309,000 ($300,000 * 103%). The unamortized discount on the bonds was $15,000; thus, the carrying amount of the bonds was $285,000 ($300,000 - $15,000). The loss recorded from this transaction is the difference between the redemption price and the carrying amount, which is $24,000 ($309,000 redemption cost - $285,000 carrying amount).