Question

1. At December 31, 2022, the following balances existed for MICPA Corporation:

Bonds Payable (6%)	$600,000
Discount 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?

Answer

$_______________

2.

On January 1, 2020, Scottsdale Company issued its 12% bonds in the face amount of $3,000,000, which mature on January 1, 2030. The bonds were issued for $$3,805,200 to yield 8%. Scottsdale uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. The 12/31/23 Premium on Bond Payable balance is:

Answer

$_______________

Answer 1

1)

Total Years remaining to maturity (31/12/2022-31/12/2028 )=6 years

Years to extinguishment (31/12/2022-1/1/2025)=2 years

Bond discount amortized for the period (31/12/2022-1/1/2025) = Unamortized bond discount * n/ years to maturity

                                  = 50000 *2/6

                                  = 16666.66667

Unamortized bond discount as on 1/1/2025 = 50000-16666.66667 = 33333.33333

carrying value of bond =Par value -unamortized discount

               = 600000 -33333.33333

               = 566666.66667

Amount of bond extinguished = carrying value * %

                        = 566666.66667 *60%

                         = 340000

Amount paid = par value *% of bond extinguished * price/ 100

             = 600000 * 60%*104 /100

            = 374400

Gain on early extinguishment = amount paid - carrying value of bond extinguished

                       = 374400 -340000

                       = 34400

2) premium on bond payable 12/31/23 = 554,732 .27   (rounded to 554732 )

Period ended	Interest paid {Face value*stated rate} [i]	Interest expense [ii]	Premium amortized [i-ii]	Unamortized premium	carrying value of bond {Face value+unamortized premium]
1/1/2020				805200     {3805200-3000000}	3805200
31/12/2020	360000    {3000000*.12}	3805200*.08=304416	55584	805200-55584= 749616	3000000+749616 =3749616
31/12/2021	360000	3749616*.08= 299969.28	60030.72	749616-60030.72= 689585.28	3000000+689585.28= 3689585.28
31/12/2022	360000	3689585.28*.08= 295166.82	64833.18	689585.28-64833.18= 624752.10	3000000+624752.1= 3624752.10
31/12/2023	360000	3624752.10*.08= 289980.17	70019.83	624752.10-70019.83=554732.27	3000000+554732.27=3554732.27