In: Accounting
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):
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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?
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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)