Question

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At December 31, 2022, the following balances existed for MICPA Corporation: Bonds Payable (6%) $600,000 Discount...

  1. At December 31, 2022, the following balances existed for MICPA Corporation:

Bonds Payable (6%)

$600,000

Discount on Bonds Payable

50,000

The bonds mature on 12/31/28. Straight-line amortization is used.

If 60% of the bonds are retired at 104 on January 1, 2025, what is the gain or loss on early extinguishment?

Answer

$_______________

2.

On January 1, 2020, Scottsdale Company issued its 12% bonds in the face amount of $3,000,000, which mature on January 1, 2030. The bonds were issued for $$3,805,200 to yield 8%. Scottsdale uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. The 12/31/23 Premium on Bond Payable balance is:

Answer

$_______________

Solutions

Expert Solution

1.

Bonds Payable =$600000

Discount on Bonds Payable = $50000

Time left to maturity of Bonds = 6 years

Straight line amortization = $50000/6 = $8333

Discount on Bond payable as on January 1, 2025 = $50000 - $8333*2 = $50000 - $16667 = $33333

Book Value of Bond as on January 1, 2025 = Bonds Payable - Discount on Bond payable as on January 1, 2025

= $600000 - $33333 = $566667

Book Value of Bonds retired as on January 1, 2025 = Total Book Value of Bond as on January 1, 2025*60% = $566667*60% = $340000

Cash paid to retire bonds as on January 1, 2025 = $360000 * 104% = $374400

Loss on early extinguishment = Cash paid to retire bonds as on January 1, 2025 - Book Value of Bonds retired as on January 1, 2025

= $374400- $340000= $34400

Answer: $34400

2.   

Interest payment = 3000000 * 12% = 360000

Effective method

Interest expenses = Bond book value at the beginning * market int. Rate

Dec 31, 20 = Interest expenses = 3805200 * 8% = 304416

Amortization on premium = Interest payment - Interest expenses

Bond premium balance = Bond premium beginning balance - Amortization on premium

Bond book value = Beginning book value - Amortization on premium

Date

Interest payment

Interest expenses

Amortization on premium

Bond premium balance

Bond book value

2020, Jan 1

805200

3805200

Dec 31, 20

360000

304416

55584

749616

3749616

Dec 31, 21

360000

299969

60031

689585

3689585

Dec 31, 22

360000

295167

64833

624752

3624752

Dec 31, 23

360000

289980

70020

554732

3554732

Calculation example for Dec 31, 2020

Interest expenses = Bond book value at the beginning * market int. Rate

Dec 31, 20 = Interest expenses = 3805200 * 8% = 304416

Amortization on premium = Interest payment - Interest expenses

360000 - 304416 = 55584

Bond premium balance = Bond premium beginning balance - Amortization on premium

805200 - 55584 = 749616

Bond book value = Beginning book value - Amortization on premium

3805200 - 55584 = 3749616

Ans:

The 12/31/23 Premium on Bond Payable balance is: $554732

ekkarill92 answered 2 years ago
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