Question

The long-term liability section of Northwest Corporation's balance sheet as of December 31, 2020, included 4% bonds having a face amount of $500,000 and a remaining discount of $90,000. Disclosure notes indicate the bonds were issued to yield 7%. Interest expense is recorded at the effective interest rate and paid on January 1 and July 1 of each year. On July 1, 2021, Northwest retired the bonds at 101 before their scheduled maturity. What is the amount of gain (loss) on early extinguishment of bonds?

Answer 1

Journal entries

1.

Interest expense $14,350

Discount on bonds $4,350

Cash $10,000

(Interest expense accounted for 6 months)

Workings :

Interest expense = (500,000-90,000) x 7% x 1/2 = 14,350

Interest paid = 500,000 x 4% x 1/2 = 10,000

The balance is used to reduce discount on bonds

2.

Bonds payable $500,000

Loss on early extinguishment $90,650

Discount on bonds $85,650

Cash $505,000

(The loss on early redemption of bonds payable recorded)

Workings :

Discount on bonds = 90,000 - 4,350 = 85,650

Cash paid = 500,000 x (101/100) = 505,000

Loss on early extinguishment is the balancing figure.

So, loss on early extinguishment is $90,650