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 for amortization, not materially different from 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

loss on extinguishment 110,000

Step-by-step explanation:

Bonds payable on Jan 1st, Year 11

face value 1,500,000

issued at 1,470,000

discount 30,000

discount armotizations is straight-line:

discount/total payment = depreciation per payment

30 year at 2 payment per year = 60

30,000/60 = 500

after 10 years 20 payment were made:

500 x 20 = 10,000

discount balance: 30,000 - 10,000 = 20,000

same procedure is done for amortization of the cost:

90,000 / 60 = 1,500

then 1,500 x 20 = 30,000

balance 90,000 - 30,000 = 60,000

bonds carrying value after 10 years:

face value 1,500,000

discount (20,000)

bond cost (60,000)

carrying value 1,420,000

Bonds were called at 102:

1,500,000 x 102/100 = 1,530,000

call - carrying = loss on extinguishment:

1,530,000 - 1,420,000 = 110,000

bonds payable 1,500,000

loss on extinguishment 110,000

discount on bond payable 20,000

issued cost on bond payable 60,000

cash 1,530,000