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may09
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Joined: 17 Dec 2008
Location: United States
Online Status: Offline
Posts: 97

Posted: 17 Dec 2008 at 23:47 \| IP Logged

Can someone help me with this question?

On June 2, 1988, Tory, Inc. issued $500,000 of 10%, 15-year bonds at par. Interest is payable semiannually on June 1 and December 1. Bond issue costs were $6,000. On June 2, 1993, Tory retired half of the bonds at 98. What is the net amount that Tory should use in computing the gain or loss on retirement of debt?

a. $249,000

b. $248,500

c. $248,000

d. $247,000

The solution is:

Choice "c" is correct. The amount used to compute a gain or loss on bond retirement is the carrying amount of the bond and the pro rata portion of bond issue cost.

Original carrying amount = $500,000

Bond issue cost ($6,000 x 10/15) = (4,000)

Net carrying amount 6-2-93 496,000

Portion retired ; ; x 50%

Amount used to compute gain/loss $248000

I don't understand why the the bond amortization is 4000. Shouldn't it be 6000 *5/15 ; i.e.,$2000. Please help..

LeadFoot
Regular
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Joined: 09 Oct 2008
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Posts: 145

Posted: 18 Dec 2008 at 08:16 \| IP Logged

Think of it this way. Bond issue cost is amortized similarly to bond discount. The net carrying amount of a bond is its face amount minus the discount yet to be amortized (or plus the premium yet to be amortized). As the discount is amortized, the net carrying amount increases to approach the face amount. Think of bond issue cost amortization the same way. In your example, you are correct the amortization to date is $2,000, which leaves $4,000 as the bond issue cost yet to be amortized, and is subtracted from the face amount to get net carrying amount for the purpose of bond retirement.

Hope this helps.

may09
Contributor

Joined: 17 Dec 2008
Location: United States
Online Status: Offline
Posts: 97

Posted: 18 Dec 2008 at 09:10 \| IP Logged

Thanks a lot LeadFoot. And Congrats on your scores!!!Hats off to you. I just wanna get done with the exam so that I can spend more time with my 2 year old twin daughters. I think they are already feeling neglected.

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