Sand,Inc.has outstanding $5,000,000,10%,20-year bonds.The bonds are callable at 104 on any interest date.The bonds were issued at par and mature in 10 years.Recently,interest rates have declined to 5% and the market price of the bonds has increased to 107.If the company exercises the call provision,the company will record:

Question

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When a company exercises the call provision at 104, it means they will pay 104% of the par value to retire the bonds early. The par value is $5,000,000, so the company will pay $5,200,000 (104% of $5,000,000) to call the bonds. Since the bonds were issued at par ($5,000,000) and are being retired for $5,200,000, the company will record a loss of $200,000 ($5,200,000 - $5,000,000) on its income statement in the year the bonds are called.

Sand,IncHas Outstanding $5,000,000,10%,20-Year Bonds