Redemption of Bonds IVESTER Company issued $600,000 face value bonds at a discou

Question

Redemption of Bonds

IVESTER Company issued $600,000 face value bonds at a discount of $9,500. The bonds contain a call provision of 102. IVESTER decides to redeem the bonds, due to a significant decline in interest rates. On that date, IVESTER had amortized only $3,300 of the discount.

Required: 1. Calculate the gain or loss on the early redemption of the bonds. Enter the amount as positive number. Round your answer to the nearest whole dollar. Gain 2. Calculate the gain or loss on the redemption, assuming that the call provision is 99 instead of 102. Enter the amount as positive number. Round your answer to the nearest whole dollar. Loss

Explanation / Answer

Solution: 1. 5,800   Loss Working notes: Redemption price $612,000 [ face value $600,000 x 1.02 call provision ] Carrying value ($606,200) [ face value $600,000 + (discount 9,500 - $3,300 amortized till date] [600,000 + 6,200 ] loss on redemption $5,800 [612,000 - 606,200 = 5,800 ] [ loss as paying value the redemption price $612,000 higher than book value the carrying value $606,200 by $5,800] 2. 12,200 Gain Working notes: Redemption price $594,000 [ face value $600,000 x 0.99 call provision ] Carrying value ($606,200) [ face value $600,000 + (discount 9,500 - $3,300 amortized till date] [600,000 + 6,200 ] Gain on redemption ($12,200) [594,000 - 606,200 = 12,200 ] [ Gain as paying value the redemption price $594,000 lower than book value the carrying value $606,200 by $12,200] Please feel free to ask if anything about above solution in comment section of the question.

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