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15 June, 18:23

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?

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  1. 15 June, 20:21
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    loss on extinguishment 110,000

    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
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