On January 2, 2009, Banno Corporation issued $1,630,000 of 10% bonds at 98 due D

Question

On January 2, 2009, Banno Corporation issued $1,630,000 of 10% bonds at 98 due December 31, 2018. Legal and other costs of $28,000 were incurred in connection with the issue. Interest on the bonds is payable annually each December 31. The $28,000 issue costs are being deferred and amortized on a straight-line basis over the 10-year term of the bonds. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable “interest method”.)

The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2014, Banno called $978,000 face amount of the bonds and redeemed them.

Ignoring income taxes, compute the amount of loss, if any, to be recognized by Banno as a result of retiring the $978,000 of bonds in 2014.

Prepare the journal entry to record the redemption.

Explanation / Answer

Face value of Bond 9,78,000 Issue price 978000*.98 958440 Discount on bond 19,560 Unamortised portion of bond discount=19560/2 9780 Unamortized Issue cos 28000/2 14000 23780 DR CR Bonds Payable 9,78,000 Loss on redemtion of bond 27,960 Discount on bond Amortized 9780 Bond issue cost unamortised 8400 Cash 978000*1.01 987780 1005960 1005960

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