The bond premium was amortized on a straight-line basis. Before income taxes, Fa

Question

The bond premium was amortized on a straight-line basis. Before income taxes, Fan's gain or loss in year 6 on this early extinguishment of debt was

On June 30, 2005, Tow Co. had outstanding 8%, $3,000,000 face amount, 15-year bonds that matured on June 30, 2015. Interest is payable on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2005 were $90,000 and $40,000, respectively. On June 30, 2005, Tow acquired all these bonds at 94 and retired them. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt?

Explanation / Answer

TOW COMPANY: Net carrying amount for computing gain or loss on early extinguishment = 3000000-90000-40000 = 2870000 To compute gain or loss the unamortized discount and issue costs are to be reduced from the face value of the bond. FAN CORP: Premium amortized as on January 1, year 6 (for 5 years) = (60000/10)*5 = 30000 Premium to be amortized for part of year 6 = (60000/5)*9/12 = 9000 Total amount amortized 39000 Unamortized amount as on October 1, year 6 = 60000-39000 = 21000 Bond carrying value = 1200000+21000 = 1221000 Total amount payable on call = 1200000*102% = 1224000 Loss on extinguishment = 1224000-1221000 = 3000 HILL CORP: Amount received towards bond price = 300*1000*103% = 309000 Amount received towards accrued interest = 300*1000*8%*2/12 = 4000 Total amount received from the bond issuance 313000

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