Question

A company issues $1,500,000 of par bonds at 98 on January 1, year 1, with a maturity date of December 31, year 30. Bond issue costs are $90,000, and the stated interest rate of the bonds is 6%. Interest is paid semiannually on January 1 and July 1. Ten years after the issue date, the entire issue was called at 102 and canceled. The company uses the straight-line method of amortization for bond discounts and issue costs, and the result of this method is not materially different from the effective interest method. The company should classify what amount as the loss on extinguishment of debt at the time the bonds are called

Answer 1

$110,000 loss

Step-by-step explanation:

Given the following :

Par value = $1,500,000 at 98

Maturity = 30 years

Interest rate = 6% paid semianually

Ten years after issue date, entire issue was called at 102 and canceled

Issue price of bond = (1500000 * 98%) = $1,470,000

Discount on issue = $1,500,000 - 1,470,000 = $30,000

After 10 years when bond was canceled :

Discount balance ;

($30,000 / maturity) * (maturity - 10)

($30,000/30)* 20 =1000 * 20 = $20,000

Issuing cost balance:

($90,000/30)*20 = 3000 * 20 = $60,000

Therefore, upon cancelation :

Carrying amount of bond

$(1500000 - 20000 - 60000) = $1,420,000

Reacquisition price :

($1,500,000 * 102%) = $1,530,000

Loss or gain :

$1,530,000 - $1,420,000 = $110,000 (loss)