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On January 1, 2015, Grouper Industries Inc. issued a $1,011,000, 10-year bond. The bond sold at...

On January 1, 2015, Grouper Industries Inc. issued a $1,011,000, 10-year bond. The bond sold at 98, and paid 13% interest each January 1 and July 1. Grouper called at 107 and cancelled the bond on January 1, 2020. Assume the company used the straight-line method of amortization.

(a1)

Calculate the gain or loss on redemption.

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Answer #1

Face Value of Bonds = $1,011,000

Issue Value of Bonds = $1,011,000 * 98%
Issue Value of Bonds = $990,780

Discount on Bonds = Face Value of Bonds - Issue Value of Bonds
Discount on Bonds = $1,011,000 - $990,780
Discount on Bonds = $20,220

Annual Coupon Rate = 13.00%
Semiannual Coupon Rate = 6.50%
Semiannual Coupon = 6.50% * $1,011,000
Semiannual Coupon = $65,715

Time to Maturity = 10 years
Semiannual Period = 20

Semiannual Amortization of Discount = Discount on Bonds / Semiannual Period
Semiannual Amortization of Discount = $20,220 / 20
Semiannual Amortization of Discount = $1,011

Discount Amortized = 10 * $1,011
Discount Amortized = $10,110

Unamortized Discount = $20,220 - $10,110
Unamortized Discount = $10,110

Carrying Value of Bonds = Face Value of Bonds - Unamortized Discount
Carrying Value of Bonds = $1,011,000 - $10,110
Carrying Value of Bonds = $1,000,890

Redemption Value of Bonds = 107% * Face Value of Bonds
Redemption Value of Bonds = 107% * $1,011,000
Redemption Value of Bonds = $1,081,770

Loss on Redemption of Bonds = Redemption Value of Bonds - Carrying Value of Bonds
Loss on Redemption of Bonds = $1,081,770 - $1,000,890
Loss on Redemption of Bonds = $80,880

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