Answer:
Loss on early extinguishment = 1,008,357.64
Explanation:
Data:
T = Interest rate = 10% = 0.10
FA = Face amount = $1,000,000
RD = Remaining Discount = $139,294
Y = Yield rate = 12% = 0.12
RT = Retirement Time = 6/12 = 0.5
BA = Bonds at = 101% = 1.01
EE = Gain (loss) on early extinguishment = ?
IE = Interest Expense = ?
D = Discount on bond payable = ?
Calculations:
IE = Y * (FA - RD) * RT
IE = 0.12 * ($1,000,000 - $139,294) * 0.5 = 0.12 * $860,706 * 0.5 = $51,642.36
D = FA - [IE - (T * FA * RT)]
D = $1,000,000 - [$51,642.36 - (0.10 * $1,000,000 * 0.5)] = $1,000,000 - [$51,642.36 - $50,000] = $1,000,000 - $1,642.36 = $998,357.64
EE = FA - [D + (FA * BA)]
EE = $1,000,000 - [$998,357.64 + ($1,000,000 * 1.01)] = $1,000,000 - [$998,357.64 + $1,010,000] = $1,000,000 - 2,008,357.64 = -1,008,357.64
EE = -1,008,357.64 (Loss)
