Question

In: Accounting

On January 1, 2014, Robbins Company issued five-year, $500,000 face value, 8% bonds that paid interest...

On January 1, 2014, Robbins Company issued five-year, $500,000 face value, 8% bonds that paid interest every June 30th and December 31st. The market rate of other similar bonds was 10%. On December 31, 2017, Robbins redeemed the bonds at 102. What was the gain or loss on redemption. Assume that Robbins uses the effective interest method to amortize any premium or discount. (Select the closest answer to the one you calculate):

a, $23,619 loss
b. $19,300 loss
c. $14,765 loss
d. $13,656 loss

e. None of these answers are correct.

Which of the following is correct when determining whether we have a gain or loss on the redemption of a bond?

a. If the redemption price is greater than the carrying value of the bond, we have a loss.
b. If the redemption price is greater than the carrying value of the bond, we have a gain.
c. If the redemption price is greater than the par value of the bond, we have a loss.
d. If the redemption price is greater than the par value of the bond, we have a gain.
e. None of these answers are correct

Solutions

Expert Solution

1. answer is option B  $19,300 loss

Issue price of bond

PV of interest payments (500000*8%/2*7.72173) = 154435

PVAF ( 5%, 10 period) = 7.72173

PV of principal (500000*0.61391) = 306955

PVF ( 5%, 10 period) = 0.61391

Total present value = 154435+306955 = 461390

date

Cash paid 4%

Interest expense 5%

Amortization of discount

Carrying value

Jan 1 2014

461390

June 30 2014

20000

23070

3070

464460

Dec 31 2014

20000

23223

3223

467683

June 30 2015

20000

23384

3384

471067

Dec 31 2015

20000

23553

3553

474620

June 30 2016

20000

23731

3731

478351

Dec 31 2016

20000

23918

3918

482269

June 30 2017

20000

24133

4113

486382

Dec 31 2017

20000

24319

4319

490701

Carrying value = 490701

Redemption value = 500000*1.02 = 510000

Loss = redemption value – carrying value = 510000-490701 = 19299 = $19300 loss (rounded by $1)   

2. Answer is option A If the redemption price is greater than the carrying value of the bond, we have a loss. (as payment will be more than the book value or carrying value of bond)

ekkarill92 answered 1 year ago
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