On January 1, 2014, New Country issued $200,000 of ten-year 8% bonds at 98. These bonds were callable at 102 at any time after three years. Straight-line amortization was used. On January 1, 2018, a new bond issue was sold and the old bonds were called. What was the loss on bond retirement?

Question

Quizplus · Accepted Answer

The loss on bond retirement is calculated by comparing the call price to the book value of the bonds at the time of retirement. The bonds were issued at 98% of the face value, so the issue price was $200,000 * 98% = $196,000. The bonds were callable at 102%, so the call price was $200,000 * 102% = $204,000. The bonds had a 10-year term with straight-line amortization, so the annual amortization amount was ($200,000 - $196,000) / 10 = $400. By January 1, 2018, four years of amortization had occurred, totaling $400 * 4 = $1,600. Therefore, the book value of the bonds on January 1, 2018, was $196,000 + $1,600 = $197,600. The loss on bond retirement is the call price minus the book value, which is $204,000 - $197,600 = $6,400.

On January 1, 2014, New Country Issued $200,000 of Ten-Year