On January 1, 2010, Newberg issued $200, 000 of ten-year 8% bonds at 98.These bonds were callable at 102 anytime after three years.Straight-line amortization was used.On January 1, 2014, a new bond issue was sold and the old bonds were called.What was the loss on bond retirement?

Question

Quizplus · Accepted Answer

The bonds were issued on January 1, 2010 and were callable on January 1, 2013 (three years later). On January 1, 2014, the old bonds were called. Therefore, the old bonds were outstanding for 4 years (2010-2013).

The amount of interest paid each year is $200,000 x 8% = $16,000. The total interest paid over 4 years is $16,000 x 4 = $64,000.

The bond discount was $200,000 x (100% - 98%) = $4,000. The bond discount was being amortized over 10 years, so the annual amortization expense was $4,000 / 10 years = $400 per year. Over 4 years, the total amortization expense was $400 x 4 = $1,600.

When the bonds were called, Newberg had to pay the bondholders the call price of 102% of the par value. The par value of the bonds was $200,000, so the call price was $200,000 x 102% = $204,000.

The loss on bond retirement is equal to the excess of the call price over the carrying value of the bonds. The carrying value of the bonds is the sum of the total interest paid and the amortized bond discount. Therefore, the carrying value of the bonds was $64,000 + $1,600 = $65,600.

The loss on bond retirement was $204,000 - $65,600 = $138,400. However, the loss on bond retirement is the portion of the loss that is attributable to the unamortized bond discount. The unamortized bond discount at the time of retirement was $4,000 - $1,600 = $2,400. Therefore, the loss on bond retirement was $2,400.

Therefore, the answer is (C) $6,400.

On January 1, 2010, Newberg Issued $200, 000 of Ten-Year