[jairvin3]

A company issues 1,500,000 of par bonds at .98 on January 1, year 1 with a maturity date of December 31, year 30. Bond issue costs are 90,000, and the stated rate is 6%. Interest is paid semi-annually on Jan 1 and July 1. Ten years after issue date, the entire issue was called at 102 and cancelled. The Co. used straight-line for amortization, not materially different from effective interest method. The Co. should classify what amount as the loss on extinguishment of debt at the time the bonds are called?

Can somebody please help me understand how the correct answer is 110,000?

Thanks.

[jairvin3]

Can somebody please help me solve this? Obviously, I wouldn't be here putting my inability to solve this thing on blast if I didn't absolutely need some guidance. Thanks-anyone.

[JohnWayneIsGod]

It would be great if someone could double-check my work, but here is what I’ve got:

Issue

Dr: Cash $1,380,000.00

Dr: BIC $90,000.00

Dr: Discount $30,000.00

Cr: B/P $1,500,000.00

(Calculations)

Cash: Face*.98 – BIC; (1500000*.98)-90000 = 1380000

BIC: 90000 as stated

Discount: Plug

B/P: Face value of bonds

Retirement

Dr: B/P: $1,500,000.00

Dr: Loss: $110,000.00

Cr: BIC: $60,000.00

Cr: Cash: $1,530,000.00

Cr: UnAmort Discount: $20,000.00

(Calculations)

B/P: As stated

Loss: Plug

BIC: Unamortized portion. (90000/30)*10 = 30000; 90000-30000 = 60000

Cash: 1500000*1.02 = 1530000

Unamortized Discount: (30000/30)*10 = 10000; 30000-10000 = 20000

Tip

Don’t forget to subtract the Bond Issue Costs (BIC) from the original cash entry upon issuance as not doing so will cause you to record the BIC twice. BIC is amortized ratably throughout the life of the bond using the straight-line method. Upon retirement, the unamortized BIC needs to be cleared out with a credit entry.

Since the question stated that the straight-line method was used to amortize the discount, the 6% stated rate was placed in there to trip people up. Upon retirement, the unamortized discount needs to be cleared out with a credit entry.

Once properly accounting for the unamortized discount and BIC, we get our loss through a plug.

FAR - 80

Courage is being scared to death, but saddling up anyway.

-John Wayne

[Anonymous]

I can get you halfway there and maybe others will be more willing to help with most of the math out of the way. 🙂

The bonds were purchased at $1,470,000 (1.5M * 98%). So $30k is amortized over 30 years at $1k/year. After 10 years, the book value of the bonds is $1,480,000. They were sold at 1.2, so they were sold for $1,530,000. Sold for $1,530,000 – 1,480,000 BV = 50,000 gain.

I believe the bond issue costs are amortized. 90k/30 years = $3k/year. So the bond issue costs on the balance sheet after 10 years are $60k.

$50k + $60k = the $110k you were looking for, but it seems that it should go in the other direction. In other words, you have $1,480,000 + $60,000 = $1,540,000 on your balance sheet and you are replacing it with $1,530,000 in cash, so it seems like a $10k loss, not a $110k loss… ?

Edit: In the time it took me to type this up, looks like John Wayne got it. Now to figure out what I'm doing wrong…

[jairvin3]

Thank you so much for the post. I will review. I really appreciate it.

[Author]

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