Question

An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition, which of the following statements is correct?

1) All of these answer choices are correct.
2) The premium must be amortized up to the purchase date.
3) Any costs of issuing the bonds must be amortized up to the purchase date.
4) Interest must be accrued from the last interest date to the purchase date.

Answer 1

The correct statement at the time of an early extinguishment of bonds issued at a premium is that the premium and interest must be amortized and accrued respectively up to the purchase date.

Step-by-step explanation:

When there is an early extinguishment of bonds payable that were originally issued at a premium, and the bonds are reacquired between interest dates, the correct statement at the time of reacquisition is that the premium must be amortized up to the purchase date. This means that any unamortized premium that existed as part of the bond issuance is accounted for up to the point of reacquisition. Additionally, interest must be accrued from the last interest date to the purchase date, which recognizes the interest expense that has been incurred by the bond issuer but has not yet been paid out to bondholders since the last interest payment date.

As for the costs of issuing the bonds, these are typically amortized over the life of the bonds, but these costs are not specifically addressed in the context of extinguishing bonds early. Therefore, the part of the statement saying "Any costs of issuing the bonds must be amortized up to the purchase date" is not relevant in this scenario.