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 semi-annually on June 30 and December 31, 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

First, we need to calculate the carrying value of the bonds on January 1, 2015.

Since the bonds were issued at a discount (the proceeds of $188,000 were less than the face value of $200,000), the carrying value of the bonds will be less than the face value.

To calculate the carrying value on January 1, 2015, we need to determine how much of the discount has been amortized (i.e. expensed) as of that date.

The bonds have a 10-year term, so they have been outstanding for 2 years (i.e. through December 31, 2014).

The annual amortization of the discount is ($200,000 - $188,000) / 10 = $1,200.

Since interest is paid semi-annually, the semi-annual amortization will be $1,200 / 2 = $600.

So, the total amortization through December 31, 2014 is:

Year 1: $600 
Year 2: $600

Total: $1,200

Therefore, the carrying value on January 1, 2015 is:

Face value - unamortized discount = $200,000 - $1,200 = $198,800

Since the call price is 101, or 101% of face value, the call price is $200,000 x 1.01 = $202,000.

When Beonce redeems the bonds on January 1, 2015, they will need to pay the call price of $202,000, but the carrying value of the bonds at that time is only $198,800.

So, Beonce will need to record a loss on redemption of $202,000 - $198,800 = $3,200.

Since this is a loss, and since it occurs when the bonds are redeemed (rather than during the amortization period), it is reported on the income statement as a loss on redemption of bonds.

Therefore, the answer is C) $11,600 loss.

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