On December 1, 2017, Cone Company issued its 8%, $710,000 face value bonds for $820,000, plus accrued interest. Interest is payable on November 1 and May 1. On December 31, 2019, the book value of the bonds, inclusive of the unamortized premium, was $750,000. On July 1, 2020, Cone reacquired the bonds at 97 plus accrued interest. Cone appropriately uses the straight-line method for the amortization because the results do not materially differ from those of the effective interest method.

Required:

Prepare a schedule to compute the gain or loss on this redemption of debt. Enter all values as positive values.

Question

Business

Bailey Glover

11 October, 09:40

On December 1, 2017, Cone Company issued its 8%, $710,000 face value bonds for $820,000, plus accrued interest. Interest is payable on November 1 and May 1. On December 31, 2019, the book value of the bonds, inclusive of the unamortized premium, was $750,000. On July 1, 2020, Cone reacquired the bonds at 97 plus accrued interest. Cone appropriately uses the straight-line method for the amortization because the results do not materially differ from those of the effective interest method.

Required:

Prepare a schedule to compute the gain or loss on this redemption of debt. Enter all values as positive values.

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Answers (1)

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Nellie · Answer 1

Gain on bond redemption is $37,400

Explanation:

Computation of gain on early retirement of bonds

Carrying value as at December 1 2017 $820,000

Carrying value as at December 31 2019 ($750,000)

Premium amortized $70,000

amortization per month ($70,000/25) $2800

(December 1 2017-December 31 2019 is 25 months)

Carrying value as at December 31 2019 $750,000

less amortization for 2020 ($2800*6 months) ($16,800)

Carrying value as at July 1 2020 $733,200

Proceeds paid for redemption ($710,000*98%) ($695,800)

Gain on redemption $37,400

At redemption the bonds were worth $733,200 but only $695,800 was paid, hence the excess is the gain on bonds redemption