Beonce Company received proceeds of $188,000 on 10-year, 6% bonds issued on January 1, 2013. 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, 2015. What amount of gain or loss would Beonce report on its 2015 income statement?
A) $9,600 gain
B) $11,600 gain
C) $11,600 loss
D) $9,600 loss

Question

Quizplus · Accepted Answer

Using the straight-line method, we need to amortize the discount on the bonds over the 10-year life of the bonds. The discount is the difference between the proceeds received and the face value of the bonds, which is $12,000 ($200,000 - $188,000).

Since the bonds were redeemed after only 2 years, we have only amortized the discount for 2 years. To determine the unamortized discount, we need to calculate what the discount should be at the end of year 2.

The total discount to be amortized over 10 years is $12,000, so each year we would amortize $1,200 ($12,000/10). After 2 years, we should have amortized a total of $2,400.

To find the unamortized discount, we subtract the total amount amortized from the total discount:

$12,000 total discount - $2,400 amount amortized = $9,600 unamortized discount

When we redeem the bonds, we will have to pay the face value of $200,000 plus the call price of 101, which is $202,000. However, since we have a discount on the bonds, we will only receive $200,400 from the redemption ($202,000 - $1,600 [unamortized discount]).

To calculate the gain or loss on redemption, we compare the amount received from the redemption to the carrying value of the bonds on the balance sheet. The carrying value is the face value of the bonds minus the unamortized discount:

$200,000 face value - $9,600 unamortized discount = $190,400 carrying value

Since we received $200,400 from the redemption, our gain on redemption is $10,000 ($200,400 - $190,400). However, since the question asks for gain or loss on the income statement, we need to subtract the gain from the unamortized discount:

$10,000 gain - $9,600 unamortized discount = $400 net gain

Therefore, the answer is C, $11,600 loss, since the net gain is less than the unamortized discount.

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