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On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method to amortize bond discounts and premiums.

-On January 1,Year 2,Pierce Corporation called the bonds payable at a price of $25,450.Which of the following shows the effect of this transaction on the elements of the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question

[The following information applies to the questions displayed below.]

On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method to amortize bond discounts and premiums.

-On January 1,Year 2,Pierce Corporation called the bonds payable at a price of $25,450.Which of the following shows the effect of this transaction on the elements of the financial statements?

A)Option A 
B)Option B 
C)Option C 
D)Option D

Quizplus · Accepted Answer

Issue price = Face value of $25,000 × 102% = $25,500
Premium = Issue price of $25,500 - Face value of $25,000 = $500
Annual amortization of premium = Premium of $500 premium ÷ 5 years = $100
Carrying value of the bonds payable on January 1,Year 2 = Bonds payable of $25,000 + Premium on bonds payable ($500 ? Year 1 amortization of $100)= $25,400
Gain (Loss)on early redemption = Call price of $25,450 - Carrying value of $25,400 = ($50)
This transaction decreases assets (cash)by $25,450,decreases liabilities (bonds payable and premium on bonds payable)by $25,400,and decreases stockholders' equity (retained earnings)by $50.It increases expenses (loss on bond redemption)by $50,which decreases net income.The cash payment of $25,450 is reported as a cash outflow for financing activities on the statement of cash flows.

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