[rockjames3of5]

Can someone help me with the journal entry for this debt extinguishment? The answer is D, but I don’t know how this looks as an entry. Here’s what I’m thinking: If my entry is correct, can someone explain why Bond Issue costs are $315,000?

DR Bond Payable 4,000,000

DR Premium 100,000

DR Loss 315,000

CR Cash 4,100,000

CR Bond Issue Costs 315,000

On its December 31, Year 1 balance sheet, Nilo Corp. reported bonds payable of $8,000,000 and related unamortized bond issue costs of $430,000 under U.S. GAAP. The bonds had been issued at par. On January 2, Year 2, Nilo retired $4,000,000 of the outstanding bonds at par plus a call premium of $100,000. This transaction is material to Nilo and is also considered to be an unusual and infrequent event. Ignoring income taxes, what amount should Nilo report in its Year 2 income statement as loss on extinguishment of debt?

a. $100,000

b. $0

c. $215,000

d. $315,000

Explanation

Choice “d” is correct. $315,000 extraordinary loss on early extinguishment of debt.

Face value of bonds retired $ 4,000,000

Less pro rata unamortized bond issue costs (4,000,000/8,000,000 x 430,000) (215,000)

Net carrying amount 3,785,000

Reacquisition price (4,000,000 + 100,000) 4,100,000

Total $ (315,000)

CPA 1 Day