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16 March, 01:11

On January 1, 2021, Tiny Tim Industries had outstanding $1,000,000 of 9% bonds with a book value of $970,500. The indenture specified a call price of $987,000. The bonds were issued previously at a price to yield 11% and interest payable semi-annually on July 1 and January 1. Tiny Tim called the bonds (retired them) on July 1, 2021. What is the amount of the loss on early extinguishment?

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  1. 16 March, 01:32
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    loss at extinguishment 8,122.50 dollars

    Explanation:

    we should compare the amount we pay for the bonds and the book value of the bonds:

    book value 978,877.50*

    call price (987,000.00)

    loss (8,122.50)

    *We are given with the value at January 1st we must adjust for the value at july 1st using effective-rate method

    970,500 x 11%/2 = 53,377.5 interest expense

    1,000,000 x 9%/2 = 45,000 cash outlay

    amortization 8,377.5

    carrying value:

    970,500 + 8,377.5 = 978,877.5
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