[grandia01]

okkk, the question asks:
“On January 1, 2007, Haven Inc. redeemed its fifteen-year bonds of $500,000 par value for 102. They were originally issued on January 1, 1995, at 98 with a maturity date of January 1, 2010. The bond issue costs relating to this transaction were $20,000. Haven amortizes discounts, premiums, and bond issue costs using the straight-line method. What amount of loss should Haven recognize on the redemption of these bonds?”
the correct answer is a “loss of $16”. can anyone explain to me how and why that answer is correct one please?
thank you much for your help 🙂

[Anonymous]

$500,000 of bonds issued at 98 means they received $490k ($500k x .98), or $10k less than face value. This will have to be amortized over the life of the loan.
Bond issue costs of $20k, per the problem, are also amortized.
So $30k needs to be amortized over over the 15 year bond life using straight-line. This is $2k per year.
After 12 years, $24k has been amortized. $6 remains. Bond book value is $494. ($500k face value with $6k remaining to be amortized.)
They redeem the bonds at 102, which means they paid $510k ($500k x 1.02). This is $10k over face value.
Difference between what was paid ($510k) and book value ($494k) is $16k, which is a loss.

[grandia01]

as always, thank you soo much bet10!!

[vodrldnr]

Gain or loss from Remotion of bond issued at discount

= Face value – Redemption cost – Unamortized BIC – Unamortized discount

[Author]

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