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Extinguishment of Bonds Prior to Maturity On December 1, 2014, Cone Company issued its 9%, $560,000...

Extinguishment of Bonds Prior to Maturity

On December 1, 2014, Cone Company issued its 9%, $560,000 face value bonds for $650,000, plus accrued interest. Interest is payable on November 1 and May 1. On December 31, 2016, the book value of the bonds, inclusive of the unamortized premium, was $590,000. On July 1, 2017, Cone reacquired the bonds at 98 plus accrued interest. Cone appropriately uses the straight-line method for the amortization because the results do not materially differ from those of the effective interest method.

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Solution

Cone Company

Computation of gain on extinguishment of debt July 1, 2017:

Book value of bonds, Dec 1, 2014

$650,000

Book value of bonds, Dec 31, 2016

$590,000

Amortization for 25 months

$60,000

Monthly amortization

$2,400

Book value of bonds, December 31, 2016

$590,000

Amortization for Jan 1, 2017 - July 1, 2017

$14,400

(2,400 x 6 months)

book value of bonds, July 1, 2017

$575,600

Cost of reacquisition

$548,800

(560,000 x 98%)

Gain on bond redemption

$26,800

Entry to record reacquisition:

Date

Account Titles

Debit

Credit

July 1, 2017

Bonds Payable

$560,000

Premium on Bonds Payable

$15,600

Cash

$548,800

Gain on Bond Redemption

$26,800
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