Joined: 10 Dec 2008
Online Status: Offline Posts: 22
Posted: 06 Mar 2009 at 06:38 | IP Logged
On 6/30/08, King Co had outstanding 9%, $5,000,000 face value bonds maturing on 6/30/13. Interest was payable semiannually every June 30 and Dec. 31. King did not elect fair value option for finan liabs. On 6/30/08, after amortization was recorded for the period, the unamortized bond premium and bond issue costs were $30,000 and $50,000, respectively. On that date, King acquired all its outstanding bonds on the open market at 98 and retired them. At 6/30/08, what amount should King recognize as gain before income taxes on redemption of bonds?
A. $20K B. $80K C. $120K D. $180K
Per the book, the answer is B. "A gain or loss on redemption of bonds is the difference between the cash paid ($5M x 98% = $4.9M) and the NBV of the bonds. To compute NBV, premium or discount and bond issue costs must be considered. Book value is $4,980,000 ($5M face less $50K bond issue costs plus $30K premium). Therefore the gain on redemption is $80K ($4,980K less $4,900 cash paid).
I think the answer is C, $120K. To extinguish the debt, wouldn't you debit Bonds Payable for $5,000K, debit Unamort Premium for $50K, credit cash for $4,900K, and credit Unamort Bond Issue Costs for $30K? I think Wiley either got the #s mixed up in the problem or the answer...?
Joined: 10 Dec 2008
Online Status: Offline Posts: 22
Posted: 09 Mar 2009 at 12:26 | IP Logged
I don't have the dollar amounts switched around; that's word-for-word from the book, on both question and answer. I just wanted to make sure that I was right and the book was wrong...thanks!
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Topic: FAR-PV of Bonds MCQ From Wiley...
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