On January 2, 2009, Banno Corporation issued $2,120,000 of 10% bonds at 97 due D
ID: 2498653 • Letter: O
Question
On January 2, 2009, Banno Corporation issued $2,120,000 of 10% bonds at 97 due December 31, 2018. Legal and other costs of $24,700 were incurred in connection with the issue. Interest on the bonds is payable annually each December 31. The $24,700 issue costs are being deferred and amortized on a straight-line basis over the 10-year term of the bonds. 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, 2014, Banno called $1,272,000 face amount of the bonds and redeemed them. Ignoring income taxes, compute the amount of loss, if any, to be recognized by Banno as a result of retiring the $1,272,000 of bonds in 2014. (Round answer to 0 decimal places, e.g. 38,548.)
Explanation / Answer
Amount of proceeds realised from the issue of $1272000 of face value of the bonds = 1272000 x 97%
= $1233840
Redemption value of $1272000 of face value of the bonds = 1272000 x 101%
= $1284720
Amount of loss to be recognised = 1284720 - 1233840
= $50880
Journal Entry:
a. Bonds Payable 1272000 Premium on redemption 12720 Cash 1284720