On January 1, 2015, Doty Co. redeemed its 15-year bonds of $5,000,000 par value for 102. They were originally issued on January 1, 2003 at 98 with a maturity date ofJanuary 1, 2018. The bond issue costs relating to this transaction were $300,000. Doty amortizes discounts, premiums, and bond issue costs using the straight-line method. What amount of loss should Doty recognize on the redemption of these bonds (ignore taxes)?

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Quizplus · Accepted Answer

The loss on redemption includes the premium paid, unamortized bond issue costs, and unamortized discount or premium on the bonds. The bonds were redeemed for 102% of their par value, so Doty paid $5,100,000 (102% of $5,000,000). They were originally issued at 98, meaning they were issued for $4,900,000 (98% of $5,000,000), resulting in a $100,000 discount. Over 15 years, the annual amortization of the discount and bond issue costs is $20,000 (($100,000 discount + $300,000 bond issue costs) / 15 years). Since the bonds were redeemed after 12 years, the total amortized amount is $240,000 (12 years * $20,000/year), leaving $160,000 ($460,000 - $240,000) unamortized (discount and bond issue costs combined). The redemption price was $5,100,000, and the book value of the bonds at redemption was $4,840,000 ($5,000,000 par - $100,000 unamortized discount + $60,000 unamortized bond issue costs), resulting in a loss of $260,000 ($5,100,000 - $4,840,000). However, the correct calculation for the loss should consider the correct components and their amounts, leading to recognizing the premium paid over par value and the remaining unamortized amounts correctly.