A corporation called an outstanding bond obligation four years before maturity.

Question

A corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of $750,000. To extinguish this debt, the company had to pay a call premium of $250,000. Ignoring income tax considerations, how should these amounts be treated for accounting purposes?

a.     Amortize $1,000,000 over four years.

b.     Charge $1,000,000 to a loss in the year of extinguishment.

c.     Charge $250,000 to a loss in the year of extinguishment and amortize $750,000 over four years.

d.     Either amortize $1,000,000 over four years or charge $1,000,000 to a loss immediately, whichever management selects.

Explanation / Answer

b. Charge 1,000,000 to a loss in the year of extinguishment.

The year in which the company decides to redeem the bond the book value of the bond becomes nil in its book. Since the call premium is being paid by the corporation for early redemption of bond it will also be charged as expense in the Income Statement in the year of redemption

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