Question

The 10% bonds payable of Kim Company had a net carrying amount (carrying value) of $2,850,000 on July 2, 2021. The bonds, which had a face value of $3,000,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On July 2, 2021, several years before their maturity, Kim retired the bonds at 101. The interest payment on July 1, 2021 was made as scheduled. What is the loss that Kim should record on the early retirement of the bonds on July 2, 2021

Answer 1

-$159,000

Step-by-step explanation:

Calculation to determine the loss that Kim should record on the early retirement of the bonds on July 2, 2021

First step is to calculate the CV of bonds

CV of bonds =$2,850,000 + [($2,850,000 × 12%/2) – ($3,000,000 × 10%/2)]

CV of bonds =$2,850,000 + [($2,850,000 × .06) – ($3,000,000 × .05)]

CV of bonds =$2,850,000 +($171,000-$150,000)

CV of bonds =$2,850,000 +$21,000

CV of bonds =$2,871,000

Now let determine the Loss

Loss=$2,871,000 – ($3,000,000 × 1.01)

Loss=$2,871,000 – $3,030,000

Loss= -$159,000

Therefore the loss that Kim should record on the early retirement of the bonds on July 2, 2021 is $159,000