Question

5a) If MSG Corporation issued $102,000 of 3-year, 7% bonds outstanding on December 31, 2020 for $106,000. The bonds pay interest annually and MSG uses straight-line amortization. On May 1, 2021, $10,200 of the bonds were retired at 120. As a result of the retirement, MSG will report: (Do not round intermediate calculations and round final answer to nearest whole dollar.)

Multiple Choice

• a $1,640 loss.

• a $1,684 loss.

• a $3,280 loss.

• a $3,280 gain.

5b) But then on January 1, 2021, MSG Corporation had outstanding $1,000,000 of 8% bonds with a book value of $967,500. The indenture specified a call price of $984,000. The bonds were issued previously at a price to yield 10% and interest payable semi-annually on July 1 and January 1. MSG Corporation called the bonds (retired them) on July 1, 2021. What is the amount of the loss on early extinguishment?

Multiple Choice

• $0.

• $7,778.

• $8,125.

• $8,375.

5c) Now supposed that on January 1, 2016, MSG Corporation issued 3,400 of its 9%, $1,000 bonds for $3,500,000. 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, MSG Corporation called all of the bonds and retired them. The bond premium was amortized on a straight-line basis. Before income taxes, MSG Corporation's gain or loss in 2021 on this early extinguishment of debt was:

Multiple Choice

• $34,000 loss.

• $84,000 gain.

• $11,000 gain.

• $21,000 gain.

Answer 1

Question 5a) Option "$1,684 loss" is the correct answer.

Value of $10200 bonds are

==> (106,000/102,000) * 10,200

==> 1.03921569 * 10,200

==> $10,600

Premium will be ==> 10,600 - 10,200 ==> $400

Carrying value on May1,2021 ==> 10600 - 400*4/36

==> $10556

Gain or Loss on retirement is

==> (10200 * 120%) - $10555

==> $1,684 Loss

Option "$1,684 loss" is the correct answer.

Question 5b) Option $8,125 is the correct answer

Book value

= $967,500 + Interest expense - Interest payment

= $967,500 + ($967,500*5%) - ($1,000,000*4%)

= $975,875

Call price = $984,000

The amount of the loss on early extinguishment is

= $984,000 - $975,875

= $8,125

Option $8,125 is the correct answer

Question 5c) Option $11,000 gain is the correct answer

Bonds Face Value = 3,400,000

Issue Price = 3,500,000

Premium on Bonds Payable

==> Issue Price - Bonds Face Value

==> 3,500,000 - 3,400,000

==> $100,000

Straight Line amortisation with every interest payment

==> 100,000/20

==> $5000

Amortisation of Premium:

July 1, 2016 == $5000
July 1, 2017 == $5000
July 1, 2017 == $5000
July 1, 2018 == $5000
July 1, 2018 == $5000
July 1, 2019 == $5000
July 1, 2019 == $5000
July 1, 2020 == $5000
July 1, 2020 == $5000
July 1, 2021 == $5000
July 1, 2021 == $5000

Total Premium Amortised ==> $55,000

Unamortised Premium

==> Premium on Bonds Payable - Total Premium Amortised

==> $100,000 - $55,000

==> $45,000

Carrying Value at retirement

==> Bonds Face Value + Unamortised Premium

==> 3,400,000 + $45,000

==> $3,445,000

Called at

==> 3,400,000 * 101/100

==> $3,434,000

Gain on early extinguishment

==> Carrying Value at retirement - Called at

==> $3,445,000 - $3,434,000

==> $11,000 gain

Option $11,000 gain is the correct answer