5) Elmira, Inc. had $20,000,000 of callable bonds outstanding on December 31, 20

Question

5) Elmira, Inc. had $20,000,000 of callable bonds outstanding on December 31, 2016. The ten-year bonds were issued on January 1, 2010 for $21,100,000 and incurred $100,000 in bond issue costs. Acme can call the bonds at 102 anytime after January 1,2016. The company uses straight-line amortization for bond issue costs and bond premium. Acme decides to call the bonds on January 2, 2017. Required: 1. Compute the gain or loss on early extinguishment of debt. 2. Prepare the journal entry to record the debt extinguishment.

Explanation / Answer

1. Carrying value of the bonds: Amount$ Bonds Payable $20,000,000 Add:Bond Premium Balance ($21,100,000-$20,000,00)/10years*3 years $330,000 Less:Unamortized Bond Issue Costs ($100,000/10years*3 years) ($30,000) Net Carrying Value of Bonds (a) $20,300,000 Amount Paid for Bonds ($20000000*102%) (b) $20,400,000 Net Loss on Bond Extinguishment c = a-b ($100,000) 2. Journal Entry Date Accounts Debit Credit 2-Jan-17 Bonds Payable 20,000,000 Bond Premium $330,000 Loss on Bond Extinguishment $100,000 Unamortized Bond Issue Costs $30,000 Cash $20,400,000 (recording the debt extinguishment.)

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