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At December 31, 2020, the following balances existed for MICPA Corporation: Bonds Payable (6%) $600,000 Premium...

  1. At December 31, 2020, the following balances existed for MICPA Corporation:

Bonds Payable (6%)

$600,000

Premium on Bonds Payable

50,000

The bonds mature on 12/31/28. Straight-line amortization is used.

If 60% of the bonds are retired at 104 on January 1, 2025, what is the gain or loss on early extinguishment?

(Please show computations and explanation)

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Answer #1

Straight Line Amortization per year = Premium on Bonds Payable / No of years

= $50,000 / 8

= $6250 per year

Premium Amortized Until 31/12/2024

= 6250 * 4 = $25000

Unamortized premium balance = 50000 - 25000

=$25000

Unamortized premium balance on 60% of Bonds = 25000 * 60%

=$15000

Fair Value of 60% of Bonds = 600000 * 60%

=$360000

Cash paid to 60% of Bonds holders = (360000 / 100) *104

=$374400

Gain on Redemption of Bonds = Faior Value of Bonds redeemed + Unamortized premium - Cash paid

= $360000 + $15000 - $374400

= $600

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