[Anonymous]

Becker Question:

On June 2, Year 1, Tory, Inc. issued $500,000 of 10%, 15-year bonds at par. Interest is payable semiannually on June 1 and December 1. Bond issue costs were $6,000. On June 2, Year 6, Tory retired half of the bonds at 98. What is the net amount that Tory should use in computing the gain or loss on retirement of debt?

Answer:

$500,000 Original carrying amount

(4,000) Bond issue costs ($6,000 x 10/15)

=496,000 Net carrying amount 6/2/Year 6

x 50% Portion retired

$248,000 Amount used to compute gain/loss

---

My question is — why is the bond issue cost calculated at 10/15? from June 1, Year 1 to June 1, Year 6 is only 5 years. The bond has a 15-year term. The bond issue cost, then, at 6/2/Year 6, should be $500,000 – ($6,000 x 5/15) = $249,000, isn’t it?

[Sherrid]

@cannotpassagain

$248,000 is the correct amount. You've got the formula correct but you must have entered the wrong number's into your

calculator. $6,000 X 5/15 = $2,000 which is the amount of the issue costs amortized. Under GAAP bond issue costs are amortized straight line over the life of the bond. The bond has a 15 year life so 5/15 has been amortized and the remaining 10/15 X $6,000 = $4,000 is unamortized. Half of the bonds were retired after 5 years- there is 10 years left to amortize.

Original carrying amount- $500,000

unamortized bond costs- (4,000)

carrying amount 6/2/06 = 496,000

percentage retired X .50

net amt to calc. g/l = 248,000

When I have a problem similar to this one I try to think of the original journal entries.

This one would be:

Dr. Cash 494,000

Dr. Bond issue cost 6,000

Cr. Bonds payable 500,000

Under GAAP bond issue costs are an asset- the company receives the bond proceeds net of the issue cost

which is paid by the broker.

I hope this helps.

[Anonymous]

@Sherrid,

Thanks for your help. J/E's definitely help, and when I can, I try to remember them.

However, to rephrase my original question, I guess I'm wondering why $6,000 x 10/15 is used instead of $6,000 x 5/15. Only 5 years have passed, so the amortized portion of the bond issue cost should be subtracted from the original carrying amount of $500,000. Instead, the answer says that the UNamortized portion is subtracted from the original carrying amount.

To calculate gain/loss, shouldn't you determine the book value of the bond? Isn't BV calculated by original cost – amortized amount to arrive at book value?

[smuppane]

The 2000 for 5 years is already expensed on the income statement of the last 5 years. They are taking what is not expensed or what would be expensed for the remaining 10 years in calculating the carrying cost.

REG - 07/01/2011 - 93
AUD - 08/25/2011 - 95
FAR - 10/29/2011 - 94
BEC - 11/28/2011 - 90

[Author]

Replies