Question

At December 31, 2014 the following balances existed on the books of Rentro Corporation:

Bonds Payable 3,500,000
Discount on Bonds Payable280,000
Interest Payable 84,000
Unamortized Bond Issue Costs210,000

If the bonds are retired on January 1, 2015, at 102, what will Rentro report as a loss on redemption?
1) $350,000
2) $472,500
3) $560,000
4) $644,000

Answer 1

To calculate the loss on redemption of Rentro Corporation's bonds, subtract the carrying amount from the sum of the reacquisition price, Interest Payable, and Unamortized Bond Issue Costs. The calculated loss is $644,000, indicating option (4) as the correct answer.

Step-by-step explanation:

The question involves calculating the loss on redemption of bonds before maturity. To determine the loss Rentro Corporation would report on the retirement of the bonds at 102, we need to consider the carrying amount of the bonds (which is the Bonds Payable minus the Discount on Bonds Payable), the reacquisition price (which is 102% of the face value of the bonds), and the Unamortized Bond Issue Costs.

The carrying amount of the bonds is $3,500,000 (Bonds Payable) - $280,000 (Discount on Bonds Payable) = $3,220,000. The reacquisition price is 102% of $3,500,000, which equals $3,570,000. The total loss on redemption is calculated by taking the reacquisition price, adding any outstanding Interest Payable and Unamortized Bond Issue Costs, and then subtracting the carrying amount of the bonds:

Loss on redemption = Reacquisition price + Interest Payable + Unamortized Bond Issue Costs - Carrying amount of the bonds

= $3,570,000 + $84,000 + $210,000 - $3,220,000

= $644,000

Therefore, the answer is (4) $644,000.