3) Darouich Industries decided to retire an $80,000,000 bond issue before its du

Question

3) Darouich Industries decided to retire an $80,000,000 bond issue before its due date. The bonds were callable by the company at 102. At the same time, the bonds were selling at 101 on the open market. The company was able to buy $40,000,00 of the bonds at 101 and called the remaining bonds. At that time, there was $2,000,000 in the Bond Discount account and $8,000,000 in the Unamortized Bond Issue Costs accounts. Compute the gain or loss on the early extinguishment of the bonds. A) S3,200,000 gain B) S9,200,000 loss C) $11,200,000 gain D) $11,200,000 loss

Explanation / Answer

Note : There must be some clerical error in printing the question , if we take that company was able to buy $40,000,00 of bonds at 101, then resultant answer will not match with none of the options given , thus in my opinion the amount must be $40,000,000 istead of $40,000,00 . The following calculations are based on the corrected figure.

Cash Required to retire the bonds = $40,000,000 * 101% + $40,000,000 * 102 % = $81,200,000

Loss on the early extinguishment of the bonds :

Cash paid + Discount on bonds + unmortized bond issue cost - Book value of bonds

$81,200,000 + $2,000,000 + $8,000,000 - $80,000,000 = $11,200,000 loss (ie Option D )

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