Question

On January 2, 2015, Vaughn Corporation issued $1,650,000 of 10% bonds at 96 due December 31, 2024. Interest on the bonds is payable annually each December 31. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable "interest method".) The bonds are callable at 102 (i.e., at 102% of face amount), and on January 2, 2017, Vaughn called $1,140,000 face amount of the bonds and redeemed them. Ignoring income taxes.
Required:
Compute the amount of loss, if any, to be recognized by Vaughn as a result of retiring the $1,140,000 of bonds in 2017

Answer 1

Answer:

$59,280

Explanation:

This can be calculated as follows:

Bond issue price = $1,650,000 * 0.96 = $1,584,000

Discount on bonds payable = $1,650,000 - $1,584,000 = $66,000

Annual amortization of discount on bonds payable = $66,000 / 10 = 6,600

Bond carrying value on January 2, 2017 = Bond issue price + (Annual discount on bonds payable * Number of years) = $1,584,000 + ($6,600 * 2) =  $1,597,200  

Value of $1,140,000 of bonds = ($1,597,200 / $1,650,000) * $1,140,000 = $1,103,520

Loss on recognized on redemption = ($1,140,000 * 102%) - $1,103,520 = $59,280