Question

On January 1, 2021, Sheffield Corp. redeemed its 15-year bonds of $7140000 par value for 101. They were originally issued on January 1, 2009 at 91 with a maturity date of January 1, 2024. Sheffield amortizes discounts and premiums using the straight-line method. What amount of loss should Sheffield recognize on the redemption of these bonds (ignore taxes)?

Answer 1

Answer:

Discount on Bonds Payable   = $7,140,000 x (1- 91%)                                                           =   $642,600

Discount amortized period = Jan 1,2009 to Jan 1,2021 = 12 Years

Unamortize discount   = Discount on Bonds Payable (-) Till date Discount                                               = $642,600 (-) $642,600 x 12 years/ 15 years                                               =    $642,600 (-) $514,080                                               = $128,520

Loss on redemption of the bonds             = Unamortize discount + Amount paid in excess             = $128,520   +   ($7,140,000 x (101% (-) 1)             =   $128,520 + ($7,140,000 x 0.01)             =   $128,520 + $71,400             =    $199,920

Loss on redemption of the bonds   = $199,920