At December 31, 2020, the 10% bonds payable of Paisley Inc. had a carrying value of $ 760,000. The bonds, which had a face value of $ 800,000, were issued at a discount to yield 12%. The amortization of the bond discount had been recorded using the effective-interest method. Interest was being paid on January 1 and July 1 of each year. The July 1, 2021 interest payment and discount amortization had been correctly recorded. On July 2, 2021, Paisley retired the bonds at 102. Ignoring income taxes, what is the loss that should be recorded on the early retirement of the bonds?

Question

Quizplus · Accepted Answer

The carrying value of the bonds payable as of July 1, 2021, can be calculated as follows:

Carrying value = Face value of bonds – Unamortized discount + Accrued interest
= $800,000 – $21,600 + $40,000
= $818,400

When the bonds are retired on July 2, 2021, Paisley Inc. will receive $800,000 x 102% = $816,000. Hence, the loss on early retirement of bonds can be calculated as follows:

Loss = Carrying value – Proceeds from retirement
= $818,400 – $816,000
= $2,400

Therefore, the loss that should be recorded on the early retirement of the bonds is $50,400 (Option C), which is the amount of the unamortized discount as of July 1, 2021.

At December 31, 2020, the 10% Bonds Payable of Paisley