On January 1, 2017, Shay issues $700,000 of 10%, 15-year bonds at a price of 97¾. Six years later, on January 1, 2023, Shay retires 20% of these bonds by buying them on the open market at 104½. All interest is accounted for and paid through December 31, 2022, the day before the purchase. The straight-line method is used to amortize any bond discount. What is the amount of the recorded gain or loss from retiring the bonds?

Question

Roman Wong

Mathematics

23 May, 12:21

On January 1, 2017, Shay issues $700,000 of 10%, 15-year bonds at a price of 97¾. Six years later, on January 1, 2023, Shay retires 20% of these bonds by buying them on the open market at 104½. All interest is accounted for and paid through December 31, 2022, the day before the purchase. The straight-line method is used to amortize any bond discount. What is the amount of the recorded gain or loss from retiring the bonds?

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Janet Shannon · Answer 1

Loss on retirement is $8190

Step-by-step explanation:

In order to determine the gain or loss on the retirement of the 20% of the bonds, one needs to know the book value of the bonds retired.

First, we calculate the book value of the entire bond as follows

Initial carrying value=$700,000*97.75%=$ 684,250.00

Initial discount on bonds issue=face value - issue price

=$700,000-$684,250

=$15750

Discount amortized over 6 years out of 15 years=15750 * 6/15=$6300

Unamortized discount==$15,750 - $6300=$9450

The book value of the bond now=face value-unamortized discount

=$700,000-$9450 = $690,550

book value of 20% bonds=$690550 * 20%=$138,110

cash paid for retirement=$700,000*20%*104.5%=$146,300

loss on retirement=$146,300-$138,100=$8190