Question

The 10% bonds payable of Yano Company had a net carrying amount of $950,000 on December 31, 2020. 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, 2021, several years before their maturity, Yano retired the bonds at 102. The interest payment on July 1, 2021, was made as scheduled. Ignoring taxes, the loss that Yano should record on the early retirement of the bonds on July 2, 2021, would be

Answer 1

Answer: 63,000

Explanation: First, take the carrying value of the bonds at the market interest rate (bond interest expense) and subtract bond interest paid to find the amortized amount: carrying amount is $950,000 with an effective interest rate of 12%.

However, interest is paid semiannually, so all interest rates should be adjusted for semiannual payments: the bond interest expense is $950,000 X 12% x 1/2 = $57,000.

The bond interest paid is the face value x stated interest rate x time period or ($1,000,000 x 10% x 1/2) or $50,000.

The amortized amount is $7,000 ($57,000 – $50,000). The new carrying amount is then $950,000 + $7,000 = $957,000.

Then find the repurchase price $1,000,000 X 1.02 = $1,020,000.

Finally, subtract the purchase price from the carrying amount: $1,020,000 - $957,000 = $63,000 loss on retirement of bonds.