Question

The 10% bonds payable of Crane Company had a carrying amount of $4060000 on December 31, 2020. The bonds, which had a face value of $3900000, were issued at a premium to yield 8%. Crane uses the effective-interest method of amortization. Interest is paid on June 30 and December 31. On June 30, 2021, several years before their maturity, Crane retired the bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is:_____.

Answer 1

Answer:

The correct answer is "43,000".

Explanation:

The given values are:

Carrying amount,

= $4060000

Face value,

= $3900000

Now,

For June 30, 2021, the Interest expense will be:

= $4060000\times 10 \ percent\times \frac{1}{2}$

= $203,000$

For June 30, 2021, the cash interest will be:

= $3900000\times 8 \ percent\times \frac{1}{2}$

= $156,000$

Now,

On June 30, 2021, the premium's amortization will be:

= Interest expense - Cash interest

= $203,000-156,000$

= $47,000$

On retirement, the cash paid will be:

= $3900000\times 104 \ percent$

= $4,056,000$

On June 30, 2021, the less carrying amount will be:

= Carrying amount - amortization

= $4060000-47000$

= $4,013,000$

Then,

The loss on retirement as well as ignoring taxes will be:

= Cash paid - less carrying amount

= $4,056,000-4,013,000$

= $43,000$