On January 2, 2015, Banno Corporation issued $1,500,000 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 101 (i. e., at 101% of face amount), and on January 2, 2020, Banno called $900,000 face amount of the bonds and redeemed them. Ignoring income taxes, compute the amount of loss, if any, to be recognized by Banno as a result of retiring the $900,000 of bonds in 2020

The loss on the redemption of the bond is $22,500

Explanation:

The requirement is to calculate the loss on redemption of the bonds in 2020.

The bond issued was at $1,500,000 due by Dec 31, 2024

The bond was called and redeemed for $900,000 face value; it was called at 101% of the face amount - January 2, 2020.

Calculate Loss on Redemption as follows:

Price for re-acquiring the bond ($101 x 900,000) $909,000

The Par Value of the bond at redemption $900,000

Subtract: Discount that is not amortized ($13,500) ($886,500)

Subtract the figure above from the price of re-acquisition $22,500

The loss on the redemption of the bond is $22,500

Note: To calculate the discount that is not amortized

1. The bond was for 10 years but was redeemed 5 years early.

2. It was due at 97 which is a discount of the face value of 100%; the discount is 100-97 = 3%

Based on these: $900,000 x 3%=$27,000

$27,000/10 years = $2,700 per year

$2,700 x 5 years remaining = $13,500