Brooks Company received proceeds of $188500 on 10-year 8% bonds issued on January 1 2015. The bonds had a face value of $200000 pay interest annually on January 1 and have a call price of 101. Brooks uses the straight-line method of amortization. Brooks Company decided to redeem the bonds on January 1 2017. What amount of gain or loss would Brooks report on its 2017 income statement?

Question

Quizplus · Accepted Answer

To calculate the gain or loss on redemption, we need to compare the carrying value (the remaining balance on the bond liability account after amortization) with the redemption price.

Step 1: Calculate the carrying value of the bonds on January 1, 2017:

The bonds were issued on January 1, 2015, with a face value of $200,000 and an 8% coupon rate. This means that the annual cash interest payment is $16,000 ($200,000 x 8%).

The bonds pay interest annually on January 1, so they would have paid interest twice by January 1, 2017:

- On January 1, 2015, the company would have received $16,000 x 1 = $16,000 in interest.
- On January 1, 2016, the company would have received another $16,000 x 1 = $16,000 in interest.

The total cash received from interest payments is $32,000 ($16,000 + $16,000). Therefore, the remaining balance on the bond liability account after amortization is:

Carrying value = Face value - Amortization of bond discount + Accrued interest
Carrying value = $200,000 - ($188,500 - $200,000)/10 x 2 + $32,000
Carrying value = $190,200

Step 2: Calculate the redemption price:

The bonds have a call price of 101, which means they can be redeemed at 101% of face value. The face value is $200,000, so the redemption price is:

Redemption price = Face value x Call price
Redemption price = $200,000 x 1.01
Redemption price = $202,000

Step 3: Calculate the gain or loss on redemption:

To calculate the gain or loss on redemption, we need to compare the carrying value with the redemption price:

Gain or Loss = Redemption price - Carrying value
Gain or Loss = $202,000 - $190,200
Gain or Loss = $11,800

Since the company has a loss on redemption, the answer is C) $11,200 loss.

Brooks Company Received Proceeds of $188500 on 10-Year 8% Bonds