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On January 1, 2021, Tiny Tim Industries had outstanding $1,000,000 of 11% bonds with a book value of $966,500. The indenture specified a call price of $983,000. The bonds were issued previously at a price to yield 13% and interest payable semi-annually on July 1 and January 1. Tiny Tim called the bonds (retired them) on July 1, 2021. What is the amount of the loss on early extinguishment?

Respuesta :

Answer:

The amount of loss on early extinguishment is $8677.5

Explanation:

In determining the loss on the early retirement of bond,we need to ascertain the carrying value of the bond to the company as at when bonds were extinguished.

The carrying value =book value+interest expense(based on book value)-coupon interest (based on face value)

book value=$966,500

interest expense=$966,500*13%/2=$62,822.50  

coupon payment=$1,000,000*11%/2=$55,000

carrying amount=$966,500+$62,822.50-$55,000=$974322.5

loss on redemption=amount paid-carrying value

amount paid on redemption was $983,000

loss on redemption=$983,000-$974,322.5 =$8677.5

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