On January 1, Year 1, David Corp. issued 1000 of its $1,000 bonds at 94. David Corp. uses U.S. GAAP. The bonds mature in 10 years but are callable at 102 any time after issuance. On January 1, Year 1, David incurred bond issue costs of $50,000. On July 1, Year 8, David called all of the bonds and retired them. Assuming that bond discount and issue costs were amortized using the straight-line method, what amount of pretax loss would David report from this extinguishment of debt?
Bond face $ 1,000,000
Issued @ 94 $ 940,000
Issue cost 50,000
Net carrying value (890,000)
Amortization per year
11,000
Jan Year 1 – July Year 8 × 7.5
Total amortization 82,500
Original net carrying value 890,000
Current net carrying value 972,500
Call price @ 102 (1,020,000)
ANSWER:
Loss on call of bonds $ (47,500)
Im getting this: Settlement price (1,020,000) – (carrying amount 940,000- unamortized disc 15000- remaining bond issue costs 12500) = 107,500.
Why do they subtract bond issue cost from the issue price? I thought it's amortized over the life of the bond, and therefore it shouldn't be subtracted to get net carrying amount.
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