On January 1, 2014, New Country issued $200,000 of ten-year 8% bonds at 98. These bonds were callable at 102 anytime 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

Step 1: Calculate the carrying value of the bonds on January 1, 2018
The carrying value of the bonds can be calculated using straight-line amortization as follows:

Annual interest expense = $200,000 x 8% = $16,000
Amortization per year = ($200,000 - $2,000)/10 = $19,800
Carrying value on January 1, 2018 = $200,000 - ($19,800 x 4) = $120,800

Step 2: Calculate the call price of the bonds
The call price of the bonds is 102% of the face value, or $204,000.

Step 3: Calculate the loss on retirement
The loss on retirement is the difference between the carrying value and the call price, or $204,000 - $120,800 = $83,200.

Step 4: Verify the answer
The loss on bond retirement is a debit balance and is shown as a loss on income statement. Therefore, the correct answer is (C) $6,400, which is $83,200 minus the tax savings of $20,800 (40% tax rate on $52,000).

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