g On January 1, 2021, Tiny Tim Industries had outstanding $1,000,000 of 11% bonds with a book value of $966,500. The indenture specified a call price of $983,000. The bonds were issued previously at a price to yield 13% 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?

Question

Dayana Lester

Business

16 May, 07:00

g On January 1, 2021, Tiny Tim Industries had outstanding $1,000,000 of 11% bonds with a book value of $966,500. The indenture specified a call price of $983,000. The bonds were issued previously at a price to yield 13% 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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Mark West · Answer 1

The loss on early extinguishment is $8677.5

Explanation:

First of all, one needs to compute the carrying value of the bond as at the date of the call in order to determine the loss on early redemption.

carrying value = book value+interest expense-coupon payment

book value is $966,500

interest expense=$966,500*13%*6/12=$62,822.50

coupon payment=$1000,000*11%*6/12=$55,000

carrying value=$966,500+$62,822.50-$55,000=$ 974,322.50

Loss on redemption = call price - carrying value of the bond

call price is $983,000

loss on early redemption=$983,000-$974,322.50 = $8,677.5