Question

On January 2, 2015, Pharoah Corporation issued $1,700,000 of 10% bonds at 97 due December 31, 2024. Interest on the bonds is payable annually each December 31. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable "interest method.") The bonds are callable at 102 (i.e., at 102% of face amount), and on January 2, 2020, Pharoah called $1,020,000 face amount of the bonds and redeemed them. Ignoring income taxes, compute the amount of loss, if any, to be recognized by Pharoah as a result of retiring the $1,020,000 of bonds in 2020. (Round answer to 0 decimal places, e.g. 38,548.)

Answer 1

The loss on redemption will be for 35,700

Step-by-step explanation:

bonds value at issuance:

1,700,000 x 97% = 1,649,000

discount: 51,000

amortized over straight line: 5,100 per year

5,100 x 5 = 25,500

discount at Jan 2020 51,000 - 25,500 = 25,500

book value at Jan 2020:

1,700,000 - 25,500 = 1,674,500

1,020,000/1,700,000 = 0.6

$1,674,500 x 60% = $1,004,7‬00

redemption cost:

1,020,000 x 102/100 = 1,040,400

Loss (difference between book value and redemption) 35,700