Riley Co. has outstanding $40 million face amount of 15% bonds that were issued

Question

Riley Co. has outstanding $40 million face amount of 15% bonds that were issued on January 1, 1998, for $39,000,000. The 20-year bonds mature on December 31, 2017, and are callable at 102 (that is, they can be paid off at any time by paying bondholders 102% of the face amount).

Assume that the bonds are called on December 31, 2010. Use the horzontal model( or write the jornal entry ) to show the effect of the retirement of the bonds. (Hint: Calculate the amount paid to bondholders; then determine how much of the bond discount would have been amortized prior to calling the bonds; and then calculate the gain or loss on retirement.)

Explanation / Answer

The discount is 1,000,000. 1,000,000 / 20 = 50,000 Discount amortized each year. 1,000,000 - (50,000 x 13 years) = 350,000 Unamortized Discount 40,000,000 - 350,000 = 39,650,000 Carrying Value of Bonds. (40,000,000 x 1.02) - 39,650,000 = 1,150,000 Loss on Early Retirement Dr Bonds Payable 40,000,000 Dr Loss on Early Retirement of Bonds 1,150,000 Cr Discount on Bonds Payable 350,000 Cr Cash 40,800,000

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