Beonce Company received proceeds of $188,000 on 10-year, 6% bonds issued on January 1, 2016. The bonds had a face value of $200,000, pay interest annually on January 1, and have a call price of 101. Beonce uses the straight-line method of amortization. Beonce Company decided to redeem the bonds on January 1, 2018. What amount of gain or loss would Beonce report on its 2018 income statement?
A) $9,600 gain
B) $11,600 gain
C) $11,600 loss
D) $9,600 loss

Question

Quizplus · Accepted Answer

The carrying value of the bonds on January 1, 2018 would be the face value ($200,000) minus the amount of bond discount amortized up until that point. The bond discount is the difference between the face value and the proceeds received, which is $12,000 ($200,000 - $188,000).

The bond discount is amortized evenly over the life of the bond, so there would be 2 years of amortization. The annual amortization expense would be $6,000 ($12,000 ÷ 2).

Therefore, as of January 1, 2018, the carrying value of the bonds would be $188,000 + $6,000 = $194,000.

Since the call price is 101, Beonce would need to pay 101% of the face value to redeem the bonds, which is $202,000 ($200,000 x 101%).

The loss on redemption would be the difference between the carrying value and the redemption price, which is $8,000 ($202,000 - $194,000).

However, since the bond discount was initially recorded as a reduction of the bonds payable account, the loss on redemption would need to be adjusted for this. The adjustment would be to add back the unamortized bond discount on the date of redemption, which is $6,000 ($12,000 total bond discount - $6,000 amortized to date).

Therefore, the net loss on redemption would be $8,000 - $6,000 = $2,000.

Since this is a loss, the answer is choice C, $11,600 loss, which is the only option that represents a loss.

Beonce Company Received Proceeds of $188,000 on 10-Year, 6% Bonds