Question

Brooks Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2016. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Brooks uses the straight-line method of amortization. Brooks Company redeemed the bonds on January 1, 2018. What amount of gain or loss would Brooks report on its 2018 income statement relative to this transaction?

Answer 1

Brooks uses the straight-line method of amortization. Brooks Company redeemed the bonds on January 1, 2018

The amount of gain reported by Brooks its 2018 income statement relative to this transaction is $190,800

Explanation:

We know that the formula for carrying value is

Carrying value =Face value - Unamortized discount

Bonds have  a face value of $200,000

Brooks Company received proceeds of $188,500

200,000 - 188,500 = 11,500 ( unamortized discount )

11,500 / 20 = 575 semiannual discount amortization

575 x 4 = 2,300 discount amortized after 4 interest payment periods.  

11,500 - 2,300 = 9,200  unamortized discount

200,000 - 9,200 = $190,800 (Carrying Value)

The amount of gain reported by Brooks its 2018 income statement relative to this transaction is $190,800