Question

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On January 1, 2016, F Corp. issued 2,200 of its 9%, $1,000 bonds for $2,274,000. These...

On January 1, 2016, F Corp. issued 2,200 of its 9%, $1,000 bonds for $2,274,000. These bonds were to mature on January 1, 2026, but were callable at 101 any time after December 31, 2019. Interest was payable semiannually on July 1 and January 1. On July 1, 2021, F called all of the bonds and retired them. The bond premium was amortized on a straight-line basis. Before income taxes, F Corp.'s gain or loss in 2021 on this early extinguishment of debt was:

Multiple Choice

$59.000 gain

$18,700 gain

$22,000 loss

$11,300 gain

Solutions

Expert Solution

Par value of bonds = $2,200,000

Issue price = $2,274,000

Premium on bonds payable = Issue price- par value of bonds

= 2,274,000-2,200,000

= $74,000

Semi annual amortization of bond premium = Premium on bonds payable/ Semi annual interest payment periods

= 74,000/20

= $3,700

Bond premium amortized till July 1, 2021 = Semi annual amortization of bond premium x 11

= 3,700 x 11

= $40,700

Unamortized bond premium on July 1 , 2021 = Premium on bonds payable- Bond premium amortized till July 1, 2021

= 74,000-40,700

= $33,300

Carrying value of bonds on July 1, 2021 = Par value of bonds +Unamortized bond premium on July 1 , 2021

= 2,200,000+33,300

= $2,233,300

Bond was callable at 101%

Cash paid to retire bonds = Par value of bonds x 101%

= $2,222,000

Gain on retirement of bonds = Carrying value of bonds on July 1, 202- Cash paid to retire bonds

= 2,233,300-2,222,000

= $11,300

Fourth option is correct.

ekkarill92 answered 2 years ago
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