On January 1, year 13, Frick Inc. redeemed its fifteen-year bonds of $500,000 pa
ID: 2757386 • Letter: O
Question
On January 1, year 13, Frick Inc. redeemed its fifteen-year bonds of $500,000 par value for 102. They were originally issued on January 1, year 1, at 96 with a maturity date of January 1, year 16. The bond issue costs relating to this transaction were $20,000. Frick did not elect the fair value option for reporting its financial liabilities. Frick amortizes discounts, premiums, and bond issue costs using the straight-line method. What amount of loss should Frick recognize on the redemption of these bonds?
Explanation / Answer
Bonds Payable = 500000
Loss = 16000
Bond Discount = 2000.02 ( 500000*/15)
Bond Issue Cost = 4000( 20000*3/15)
Cash 510000 ( 500000*1.02)
The bond term is 15 years, Retirement is 3 years before maturity. Under straight line method, 3/15of both the total bond discount and bond issue cost would remain unamortized at the retirement date.