Concept Check v Enterprise Group issued $100,000 of 3-year, 6% bonds outstanding

Question

Concept Check v Enterprise Group issued $100,000 of 3-year, 6% bonds outstanding on December 31, 2015 for $106,000. Enterprise uses straight-line amortization. On May 1, 2016, $10,000 of the bonds were retired at 110. As a result of the retirement, Enterprise will report a: a. $400 loss. b.) $467 loss. Interest expense (to balance) 133 67 $1,100lossable3 Bonds payable (S6.000 x 1/3 x4/12) x 10% ) C. Interest payable ($100,000 x 6%; 4/12 ] x 10%) 200 d. $1,100 gain Bonds payable (book value) Loss on early extinguishment (to balance) 10,553 467 Cash (call price) 11,000 Paid at redemption: $10,000 x 110% = Book value: [$106,000-($6,000 x 1 /3 x 4/12)) x 10% = Loss $11,000 10,533 $ 467

Explanation / Answer

Answer is b. Loss of $ 467.

Explanation:

Bonds Issue price: 106000 Less: par value 100000 Premium on bonds 6000 Amortization per month (6000/36) = 166.67 On May1, after fourr month, 10% of bonds retired, Book value of 10% of these bonds: Par value of bonds (10% of $100,000) 10000 Add: Unamortized premium 533 (166.67*32*10%) (i.e. Remaining period is of 32 months i.e. 36-4) Book value of 10% of these bonds: 10533 Less: payment made on retirement 11000 ($10,000 at 110) Loss on retirement of bonds 467

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