[grandia01]

hello all:
the question asks: “On June 30, year 4, after paying the semiannual interest due and recording amortization of bond discount, Griffin redeemed its fifteen-year, 8% $1,000,000 par bonds at 102. The bonds, which had a carrying amount of $940,000 on January 1, year 4, had originally been issued to yield 10%. Griffin uses the effective interest method of amortization, and had paid interest and recorded amortization on June 30. Compute the amount of gain or loss on redemption of the bonds and select the proper financial statement category.”
and the right answer is $73,000 loss – under “Income from continuing operations”, can someone explain to me how that answer is the correct one please?
thank you so much

[vodrldnr]

say IDEA PUFER !

Income from continuing operation
Discontinued operation
Extra ordinary items (Amended by FASB recently, so you will not see any extra ordinary item question on exams)
Accounting principle changes to retained earning

Pension adj
Unrealized G/L from AFS
Foreign currency Adj
Effective portion of cash flow hedge
Revaluation surplus under IFRS

————————————————–

Gain or loss from reception of bond is not part of PUFER (OCI), therefore it is part of income from conturing operation. (more specifically I guess it is under Other Gain or Loss)

Back to the question.

To find G/L At this count

YOU need to use this formula

Face value -redemption cost -unamortized discount- unamortized BIC

This problem actually make the calculation easy by giving you BV of bond As of 1/1 Year 4 and no mention about BIC

1000,000- 1,020,000 -? – 0

Unamortized discount = (Carrying amount -face value)

To find Carrying to complete the calculation

you have to find total amortization for the year 4

(940,000*0.1)-(1,000,000*0.08) => this will give you the amortization for the whole year 4

BUT you have to divide it by 2 because the redemption date is 6/30 y4

So, the half year amortization will be 7,000

And the carrying amount of Bond as of 6/31 Y4 will be 947,000 (= 940,000+7,000)

Since we need to find how much is unamortized, we have to 1,000,000 -947,000 = 53,000

NOW we have all the information we need to kill this problem!

1000,000- 1,020,000 -5300 – 0 = -73,000

[vodrldnr]

It is better to draw a picture to solve this problem

|—————–>Remption cost
|
|
|——————>Face value
|
|
|——————>Carrying amount

The difference between carrying amount and Face value is the unamortized discount

In case of Premium, the dawning will be opposite

[grandia01]

got it!! thank you so much my good sir/madam!!

[Author]

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