Question

Will Rate immediately
On 1/1/Year 1, Flint Co. (a U.S. GAAP company) issues an annual-pay, 10-year, $750,000, 4.25% coupon bond when market rates are 5.00%. The bond's issuance price is $706,565. One year later, Flint redeems the bond at 94.

Answer 1

Requirement 1:

Answer: $39,982

Calculations:

Face value of the bond	$750,000
(Less): Issue price	($706,565)
Total discount	$43,435
(Less): Discount amortized [From amortization table*]	($3,453)
Unamortized discount	$39,982

*Amortization table
Year	Cash paid	Interest expense	Discount amortized	Carrying value
0				$706,565
1	$31,875	$35,328	$3,453	$710,018
2	$31,875	$35,501	$3,626	$713,644
3	$31,875	$35,682	$3,807	$717,451
4	$31,875	$35,873	$3,998	$721,449
5	$31,875	$36,072	$4,197	$725,646
6	$31,875	$36,282	$4,407	$730,054
7	$31,875	$36,503	$4,628	$734,681
8	$31,875	$36,734	$4,859	$739,540
9	$31,875	$36,977	$5,102	$744,642
10	$31,875	$37,232	$5,357	$750,000

Cash paid = $750,000 x 4.25% = $31,875

Interest expense = Preceding Carrying value x 5%

Discount amortized = Cash paid - Interest expense

Requirement 2:

Gain or Loss	Loss
Amount	$5,018

Calculations:

Cash received [750,000 x 0.94]		$705,000
Carrying value:
Face value	$750,000
(Less): Unamortized discount	($39,982)	$710,018
Gain/(loss)		($5,018)

Requirement 3:

Account title and Explanation	Debit	Credit
Cash	$705,000
Discount on bonds payable	$39,982
Loss on retirement of bonds	$5,018
Bonds payable		$750,000
[To record extinguishment of bonds]