Question

On January 1, 2018, The Partial had bonds with a face value of $ 1,000,000, a coupon rate of 12% and an unpaid balance (book value) of $ 966,130. The contract specified a call price of $ 981,000.

The bonds were previously issued with a market yield of 14% and interest is paid semi-annually, every June 30 and December 31. The company retired the bonds early on July 1, 2018. What is the book value of July 1, 2018?

a) $ 966,130

b) $ 973,759

c) $ 981,000

d) $ 958,501

e) None of the above

Answer 1

Answer:

Option (b) is the correct answer. i.e $973,759

Explanation:

Bonds payable (Face amount)	$         1,000,000
Less: Discount on bonds payable ($1,000,000 - [966,130 + 7,629])	26,241
Book value of July 1, 2018	$             973,759

Interest expense ($966,130*7%)	67,629
Discount on bonds payable (difference)		7,629
Cash		60,000
Bonds payable (Face amount)	1,000,000
Loss on early extiguishment (balance)	7,241
Discount on bonds payable ($1,000,000 - [966,130 + 7,629])		26,241
Cash (Call price)		981,000