On July 1, 2005 Cooper Corporation issued for $960,000 one thousand of its 9 percent, $1,000 callable bonds. The bonds are dated July 1, 2005, and mature on July 1, 2015. Interest is payable semiannually on January 1 and July 1. Cooper uses the straight-line method of amortizing bond discount. The bonds can be called by the issuer at 101 at any time after June 30, 2010. On July 1, 2011, Cooper called in all of the bonds and retired them. Ignoring income taxes, how much loss should Cooper report on this early extinguishment of debt for the year ended December 31, 2011?

Question

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The first step in calculating the loss on extinguishment of debt is to calculate the carrying value of the bonds at the time of redemption. The bond was issued for $960,000, and the discount is $60,000 ($1,000,000 - $960,000). Since the bonds were retired on July 1, 2011, only two years of amortization have been recorded, which amounts to $12,000 per year ($60,000 / 5 years = $12,000 per year). Therefore, the carrying value of the bond at the time of redemption was $936,000 ($960,000 - $24,000).

Next, we need to compare the carrying value of the bond to the amount paid to retire the bond. Since the bonds were called at 101, the amount paid to retire the bond was $1,010,000 ($1,000 x 1.01 x 1,000 bonds).

The loss on extinguishment of debt is calculated as the difference between the carrying value of the bond and the amount paid to retire the bond. In this case, the loss on extinguishment of debt is $74,000 ($936,000 - $1,010,000).

Therefore, the answer is C) $26,000 ($74,000 loss – $48,000 loss from amortization for two years).

On July 1, 2005 Cooper Corporation Issued for $960,000 One