The 10% bonds payable of Nixon Company had a net carrying amount of $950,000 on December 31, 2014. The bonds, which had a face value of $1,000,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. OnJuly 2, 2015, several years before their maturity, Nixon retired the bonds at 102. The interest payment on July 1, 2015 was made as scheduled. What is the loss that Nixon should record on the early retirement of the bonds on July 2, 2015? Ignore taxes.
A) $20,000.
B) $63,000.
C) $56,000.
D) $70,000.

Question

Quizplus · Accepted Answer

The loss on early retirement of the bonds is calculated as the difference between the retirement price and the net carrying amount of the bonds. The bonds were retired at 102% of their face value, which is $1,000,000 * 102% = $1,020,000. The net carrying amount on December 31, 2014, was $950,000. However, since interest is paid semi-annually and the bond discount is amortized using the effective-interest method, the carrying amount would have increased due to the amortization of the discount by the time of the July 1, 2015 interest payment. This detail, however, is not provided, but it's not needed to calculate the loss based on the information given. The loss is the difference between the retirement cost ($1,020,000) and the net carrying amount as of the last known date ($950,000), which is $1,020,000 - $950,000 = $70,000. However, considering the effective interest method's impact on the carrying amount by the time of retirement, and without specific numbers on the amortization from December 31, 2014, to July 2, 2015, the correct calculation based on the provided information would directly compare the retirement cost and the net carrying amount as of the last known date, leading to a direct calculation error in this explanation. The correct approach involves acknowledging the bond's carrying value adjustment due to amortization up to the retirement date, which isn't specified in the provided details, making a precise calculation challenging without additional information. Given the options and the typical process for such calculations, the correct answer would involve understanding the bond's carrying value adjustment up to the retirement date, which isn't directly provided.

The 10% Bonds Payable of Nixon Company Had a Net