Question

Brooks Company received proceeds of $188500 on 10-year, 8% bonds issued on January 1, 2018. The bonds had a face value of $200000, pay interest annually on January 1, and have a call price of 101. Brooks uses the straight-line method of amortization. Brooks Company decided to redeem the bonds on January 1, 2020. What amount of gain or loss would Brooks report on its 2020 income statement? $9200 gain $11200 gain $11200 loss $9200 loss

Answer 1

Answer:

The correct answer to the following question will be "$11200 loss".

Explanation:

The given call price = 101

If we void the bond or we'll have to compensate,

⇒  $\frac{200000\times 101}{100}$

⇒  $$202000$

So that we will invite loss of $2000

Bonds are often issued approved discount with,

⇒ $200000-188500$

⇒ $$11500$

But bonds were authorized in January 2018 and most are resurrected on January 2017 so we'll have to amortize discount on bonds for 2 years

Hence amortized, now,

⇒ $\frac{11500}{10}$

⇒ $$1150 \ per \ year$

Hence, discount on bond measure pending amortization,

⇒ $11500-1150-1150$

⇒ $$9200$

Now, Total loss:

⇒ $9200+2000$

⇒ $$11200$

So that Option C seems to be a right answer.