On January 1, 2013, Tiny Tim Industries had outstanding $1,000,000 of 12% bonds with a carrying amount of $966,130. The indenture specified a call price of $981,000. The bonds were issued previously at a price to yield 14%. Tiny Tim called the bonds (retired them) on July 1, 2013. What is the amount of the loss on early extinguishment?
A)$0.
B)$6,932.
C)$7,241.
D)$7,629

Question

Quizplus · Accepted Answer

The loss on early extinguishment is the difference between the carrying amount of the bonds (which is the book value of the liability) and the call price paid to retire the bonds. In this case, the carrying amount of the bonds is $966,130 and the call price is $981,000. Therefore, the loss on early extinguishment is $14,870 ($981,000 - $966,130).

Note that the original issue price of the bonds and the yield to maturity are not relevant for calculating the loss on early extinguishment.

On January 1, 2013, Tiny Tim Industries Had Outstanding $1,000,000