Question

The 10% bonds payable of Nixon Company had a net carrying amount of $950,000 on December 31, 2014. The bonds, which had a face value of $1,000,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On July 2, 2015, several years before their maturity, Nixon retired the bonds at 102. The interest payment on July 1, 2015 was made as scheduled. What is the loss that Nixon should record on the early retirement of the bonds on July 2, 2015? Ignore taxes

Answer 1

Answer:

The loss is $63,000.

Explanation:

The loss on the retirement of bond is the difference between the retirement value of the bond and the book value of the bond. It is calculated as follows.

Calculation of loss on retirement of bond:

Retirement value of bonds ($1,000,000 x 102 / 100)          $1,020,000

Interest payment ($1,000,000 x 10% x 6/12)                        $50,000

Interest expense ($950,000 x 12% x 6/12)                           $57,000

Amortization of bond discount ($57,000 - $50,000)          $7,000

Debit balance in bond discount ($50,000 - $7,000)           $43,000

Credit balance in accounts payable                                      $1,000,000

Book value of bond ($1,000,000 - $43,000)                        $957,000

Loss on retirement of bond ($1,020,000 - $957,000)       $63,000