Question

On January 1, 2014, Maine Company issued a 10% callable bond which has a par value...

  1. On January 1, 2014, Maine Company issued a 10% callable bond which has a par value of $100,000 for $92,000. The bond is callable at 103 anytime after January 1, 2019. The entire bond was called back on January 1, 2020 when the unamortized discount had a balance of $2,000. Compute the amount of the gain or loss when the bond was retired on January 1, 2020.
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Answer #1

In order to determine the amount of gain or loss on the bond, calculate the carrying value of the bond

Step 1:-

Carrying value of the bond = Par value - Unamortized discount

Carrying value of the bond = $100,000 - $2,000

Carrying value of the bond = $98,000

Step 2:-

Retirement price of the bond = Par Value * 103%

Retirement price of the bond = $100,000 * 103%

Retirement price of the bond = $103,000

Step 3:-

Gain/loss on retirement = Retirement Price - Carrying value

=$103,000 - $98,000

Gain/Loss on Retirement = 5,000 Loss on retirement

Since the retirement value is higher than the carrying value of the bond, the bond has been retiredat a loss.

Please let me know if you have any questions via comments and all the best :)

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