Didde Company issues $20,000,000 face value of bonds at 95 on January 1, 2013. T

Question

Didde Company issues $20,000,000 face value of bonds at 95 on January 1, 2013. The bonds are dated January 1, 2013, pay interest semiannually at 8% on June 30 and December 31, and mature in 10 years. Straight-line amortization is used for discounts and premiums. On May 1, 2016, $12,000,000 of the bonds are called at 102 plus accrued interest. What gain or loss would be recognized on the called bonds on September 1, 2016?

a.   $1,200,000 loss

b.   $564,000 loss

c.   $700,000 loss

d.   $640,002 loss

Explanation / Answer

Calculation of loss would be recognized on the called bonds on September 1, 2016 :

Value of the bond on September 1, 2016 = [($20,000,000 / 100 x 95) + ($1,000,000 / 10 x 3 1/3) ] x 0.60
= ($19,000,000 + 333,333) x 0.60
= $11,600,000

Loss on  called bonds = [($12,000,000 / 100 x 102) - $11,600,000 = $640,002 loss

Option d.   $640,002 loss is correct answer.

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