Question

On June 2, Year 1, Tory, Inc. issued $500,000 of 10%, 15-year bonds at 98.8. Interest is payable semiannually on June 1 and December 1. Discount at issuance was $6,000. Tory uses the straight-line method to amortize the discount, which does not differ materially from GAAP in this instance. On June 2, Year 5, Tory retired half of the bonds at 98. What is the net amount that Tory should use in calculating the gain or loss on retirement of debt

Answer 1

$247,800

Step-by-step explanation:

Discount on bonds payable = $6,000

The discount on bonds payable should be amortized during the 30 coupon payments = $6,000 / 30 = $200

Only 4 years have passed until the partial redemption of the bonds, $200 x 8 = $1,600 of the discount on bonds payable had been amortized. The carrying value of the bonds = $500,000 - ($6,000 - $1,600) = $495,600

Since 50% of the bonds are being retired, the net amount used to calculate the retirement = $495,600 / 2 = $247,800