Question

On January 2, Year 1, the ABC Inc. a private-held company whose fiscal year end is December 31, issued $2,200,000, five-year, 12% of bonds, dated January 2, Year 1. The bonds provided for semiannual interest payments to be made on June 30 and December 31 of each year. The bond comes with a call option which allows ABC to call back at 102 after one year. The bonds were issued when the market interest rate was 8%.

● ABC uses the effective interest method for amortizing bond discounts and premiums.

● The company called the bonds at 102 on June 30, Year 2.

Present Value Factors

PV of $1 at 12% for 5 periods                                                          0.5674

PV of $1 at 6% for 10 periods                                                          0.5584

PV of $1 at 4% for 10 Periods                                                          0.6756

PV of an annuity of $1 at 12% for 5 periods                                     3.6048

PV of an annuity of $1 at 6% for 10 periods                                     7.3601

PV of an annuity of $1 at 4% for 10 periods                                     8.1109

Required:

Please prepare the bond amortization table for the original ABC bond which issued 1/2/Year 1.

Please calculate the gain or loss on the early retirement of the bond.

Answer 1

Solution 1:

Computation of bond price
Table values are based on:
n=	10
i=	4.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.6756	$2,200,000.00	$1,486,320
Interest (Annuity)	8.1109	$132,000.00	$1,070,639
Price of bonds			$2,556,959

Bond Amortization Schedule
Date	Cash Paid	Interest Expense	Premium Amortized	Unamortized Premium	Carrying Value
Issue Date				$356,959	$2,556,959
Year 1, Jun 30	$132,000	$102,278	$29,722	$327,237	$2,527,237
Year 1, Dec 31	$132,000	$101,089	$30,911	$296,327	$2,496,327
Year 2, Jun 30	$132,000	$99,853	$32,147	$264,180	$2,464,180
Year 2, Dec 31	$132,000	$98,567	$33,433	$230,747	$2,430,747
Year 3, Jun 30	$132,000	$97,230	$34,770	$195,977	$2,395,977
Year 3, Dec 31	$132,000	$95,839	$36,161	$159,816	$2,359,816
Year 4, Jun 30	$132,000	$94,393	$37,607	$122,209	$2,322,209
Year 4, Dec 31	$132,000	$92,888	$39,112	$83,097	$2,283,097
Year 5, Jun 30	$132,000	$91,324	$40,676	$42,421	$2,242,421
Year 5, Dec 31	$132,000	$89,579	$42,421	$0	$2,200,000

Solution 2:

Gain or loss on early retirement = Carrying value - Retirement value = $2,464,180 - ($2,200,000*102%) = $220,180 Gain