Exercise 10-9 Straight-Line: Bond computations, amortization, and bond retiremen

Question

Exercise 10-9 Straight-Line: Bond computations, amortization, and bond retirement LO P2, P4

[The following information applies to the questions displayed below.]

On January 1, 2017, Shay issues $390,000 of 8%, 20-year bonds at a price of 97.00. Six years later, on January 1, 2023, Shay retires 20% of these bonds by buying them on the open market at 104.50. All interest is accounted for and paid through December 31, 2022, the day before the purchase. The straight-line method is used to amortize any bond discount.

Exercise 10-9 Part 4

4. What is the carrying (book) value of the bonds and the carrying value of the 20% soon-to-be-retired bonds as of the close of business on December 31, 2022?
  

Explanation / Answer

Shay issued bonds at a discount of $3 per bond. The total amount of discount is 3900 bonds *$3 = $11,700.

The discount will be amortised over a period of 20 years. Till date, the discount has been amortised for a period of 5 years i.e $11,700*5/20=$2,925

As on 1.01.2023, the amount of unamortized discount = $11,700 - $2,925 = $8,775

Therefore, carrying value of total bonds is $3,90,000 - $8,775 = $3,81,225

Carrying value of retired bonds is $3,81,225 x 20% = $76,245

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