On January 1, 2021, Tiny Tim Industries had outstanding $1,000,000 of 9% bonds with a book value of $970,500. The indenture specified a call price of $987,000. The bonds were issued previously at a price to yield 11% and interest payable semi-annually on July 1 and January 1. Tiny Tim called the bonds (retired them) on July 1, 2021. What is the amount of the loss on early extinguishment?

Question

Business

Niko Reynolds

10 January, 23:47

On January 1, 2021, Tiny Tim Industries had outstanding $1,000,000 of 9% bonds with a book value of $970,500. The indenture specified a call price of $987,000. The bonds were issued previously at a price to yield 11% and interest payable semi-annually on July 1 and January 1. Tiny Tim called the bonds (retired them) on July 1, 2021. What is the amount of the loss on early extinguishment?

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Answers (1)

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Jase Davenport · Answer 1

loss at extinguishment 8,122.50 dollars

Explanation:

we should compare the amount we pay for the bonds and the book value of the bonds:

book value 978,877.50*

call price (987,000.00)

loss (8,122.50)

*We are given with the value at January 1st we must adjust for the value at july 1st using effective-rate method

970,500 x 11%/2 = 53,377.5 interest expense

1,000,000 x 9%/2 = 45,000 cash outlay

amortization 8,377.5

carrying value:

970,500 + 8,377.5 = 978,877.5