Please tell me how to compute Bond early redemption, can anyone make a journal and compute gain or loss? and Drawing #6 - Paseo/Bond Bridges - July 7, 2010

Please tell me how to compute Bond early redemption, can anyone make a journal and compute gain or loss?

On January 1st, 1998, ABC company issued $ 800,000 of 8% bonds at 97maturing in 10 years. Bond issue costs of $ 16,000 were incurred. Interest was payable semiannualy on July 1st and January1st. The issue costs and discount of bonds are being amortised on the straight line basis. The bonds are callable at 101. ABC retired $ 400,000 of face amount of the bonds on July 1st, 2002. Compute the amount of gain or loss from the early redemption of the bonds.


Bond best answer:

Answer by Sandy
When the bond was issued,
Dr Cash $ 760,000
Dr Bonds discount $ 24,000 (to amortize over 20 interest periods)
Dr Issue costs $ 16,000 (to amortize over 20 interest periods)
Cr Bonds payable $ 800,000

Issue costs if immaterial can be expensed off immediately but in this question they want you to amortize them.

These are 10-yr bonds with semiannual interest, so there'll be 20 interest periods. By July 1, 2002, 9 periods will have elapsed.

To calculate unamortized bonds discount:
Original amt $ 24,000
less 9/20 ($ 10,800)
Unamortized discount at July 1, 2002 $ 13,200

To calculate unamortized issue costs:
Original amt $ 16,000
less 9/20 ($ 7,200)
Unamortized costs at July 1, 2002 $ 8,800

You retired half of the bonds payable ($ 400k out of $ 800k), so you have to halve the unamortized bonds discount ($ 6,600) and the issue costs ($ 4,400) too. The carrying value of the bonds called will be:
Face value $ 400,000
less:
Unamortized bonds discount ($ 6,600)
Unamortized issue costs ($ 4,400)
Carrying value = $ 389,000

You called the $ 400,000 at 101, so you had to pay out $ 404,000, thereby incurring a loss of $ 15,000, i.e. $ 404,000 less $ 389,000.

The journal entry will be:
Dr Bonds payable $ 400,000
Dr Loss on bonds redemption $ 15,000
Cr Bonds discount $ 6,600
Cr Issue costs $ 4,400
Cr Cash $ 404,000

Bond

Drawing #6 - Paseo/Bond Bridges - July 7, 2010


Image by CoolValley
The old making way for the new.

The Paseo bridge is being replaced with the Bond bridge.

The Paseo bridge has been around for about 50 years or so. The Bond bridge is scheduled for a 2011 opening.

These bridges carry north and southbound federal highways I-29 and I-35 across the Missouri river at Kansas City, Missouri.

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