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ms500
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Posted: 31 Jul 2010 at 19:01 | IP Logged  

On june 2'1988, Tory Inc issued $500,000 of 10%, 15 year bonds at par. Interest is payable semianually on june 1 and december 1. Bond issue costs were $6000. On june 2'1993 Troy retired half of the bonds at 98. What is net amount that Troy should use in computing the gain or loss on retirement of debt

a-249000
b-248500
c-248000
d-247000

Ans- is C- 248000

 
Original CV         & ; ;nbs p;     500000
less:Bond issue costs          4000**
Net CV         & ; ;nbs p;         & ;nbs p; 496000, 50% retired i.e. $ 248000

bond issue costs $ 6000 x 10/15 yrs=4000**

as per my understanding, amortization of bond issue costs should be $6000x5/15=2000
as, bonds are retired after 5 years, so proptionatly amortization should be for 5yrs not 10 years as mentioned in the solution

Appreciate if some one clarify above

thanks


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jsanders02
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Posted: 31 Jul 2010 at 20:03 | IP Logged  

Bond issue costs are amortized over the life of the debt on a straight line basis. We have already amortized 5 years of the costs, and we should
amortize the remaining 10 years for HALF of the cost remaining. That's why it is 10/15, because we must amortize the remaining cost that has not
already been amortized, but again, only for half of the remaining debt. We will continue to amortize the remaining $2,000 over the life of the
remaining debt.

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1tryCPA
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Posted: 31 Jul 2010 at 21:32 | IP Logged  

to calculate retirement of bonds, we need to calculate CV.
CV of the bonds is Original CV less unamortized portion of bond issue costs - that is for 10 years as 5 already amortized.


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FC.CPA
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Posted: 31 Jul 2010 at 23:44 | IP Logged  

You subtract the UNAMORTIZED bond issue cost, not the
amortized one. The $2000 you calculated is the
amortization, so the unamortized would be 6000-2000 = 4000.

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ms500
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Posted: 01 Aug 2010 at 00:33 | IP Logged  

Thanks jspanders, 1trycpa and FC.CPA

I got it now, thanks for clarifying

tks


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