Question

Redemption of Bonds

OPAL Company issued $400,000 face value bonds at a discount of $8,000. The bonds contain a call provision of 101. OPAL decides to redeem the bonds due to a significant decline in interest rates. On that date, OPAL had amortized only $2,400 of the discount.

Required:

1. Calculate the gain or loss on the early redemption of the bonds. Enter the amount as positive number. Round your answer to the nearest whole dollar.
$ Loss

2. Calculate the gain or loss on the redemption assuming that the call provision is 98 instead of 101. Enter the amount as positive number. Round your answer to the nearest whole dollar.
$ Gain

Answer 1

• Requirement 1

A	Face Value		$400,000
	Discount	$8,000
	Discount amortised	($2,400)
B	Unamortised Discount		$5,600
C = A - B	Book Value at time of redemption		$394,400
D	Redeemed at	[400000 x 101/100]	$404,000
E = D - C	Loss [as cash paid on redemption is more than Book Value]		$9,600 = Answer

• Requirement 2

A	Face Value		$400,000
	Discount	$8,000
	Discount amortised	($2,400)
B	Unamortised Discount		$5,600
C = A - B	Book Value at time of redemption		$394,400
D	Redeemed at	[400000 x 98/100]	$392,000
E = C- D	Gain [as cash paid is less than Book Value]		$2,400 = Answer