Question

On January 2, 2012, Banno Corporation issued \(1,500,000 of 10% bonds at 97 due December 31, 2021. Interest on the bonds is payable annually each December 31. 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, 2017, Banno called \)900,000 face amount of the bonds and redeemed them.

Instructions

Ignoring income taxes, compute the amount of loss, if any, to be recognized by Banno as a result of retiring the $900,000 of bonds in 2017 and prepare the journal entry to record the redemption.

Short answer

Loss on redemption is $22,500

Step-by-step solution

Meaning of Bonds

Bonds refer to a document issued by a company to take money from the investors in the form of a loan and be ready to pay the fixed interest and the principal amount at the maturity date.

Computation of loss and preparing journal entry

Calculation of loss on redemption

Reacquisition price $\left(\$900,000\times 101\%\right)$	$909,000
Less: Net carrying amount of bonds redeemed:
Par value $900,000
Unamortized discount $\left(\$2,700\times 5\right)$ (13,500)	886,500
Loss on redemption	$22,500

Calculation of unamortized discount

$\begin{array}{rcl}\mathbf{Unamortized}\mathbf{}\mathbf{discount}& \mathbf{=}& \mathbf{Bond}\mathbf{}\mathbf{value}\mathbf{\times }\mathbf{Discount}\mathbf{}\mathbf{rate}\\ & \mathbf{=}& \mathbf{\$}\mathbf{900}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{3}\mathbf{\%}\\ & \mathbf{=}& \mathbf{\$}\mathbf{27}\mathbf{,}\mathbf{000}\end{array}$

Calculation of amortization per year

$\begin{array}{rcl}\mathbf{Amortization}\mathbf{}\mathbf{per}\mathbf{}\mathbf{year}& \mathbf{=}& \frac{\mathbf{Unamortized}\mathbf{}\mathbf{discount}}{\mathbf{Bond}\mathbf{}\mathbf{amortization}\mathbf{}\mathbf{year}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{27}\mathbf{,}\mathbf{000}}{\mathbf{10}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{700}\end{array}$

Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
Jan. 2, 2017	Bonds payable	$900,000
	Redemption loss	$22,500
	Unamortized discount		$13,500
	Cash		$909,000