Question

On January 1,2021,Pan Company issued$840,000 of 8%,10-year bonds for 97.Pan retired all of these bonds on January 1,2022,at 102.If Pan uses the straight-line amortization,how much loss should be recognized on this bond retirement?

Answer 1

Loss on bond retirement    [Refer working note 1]

$39,480

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Working Note 1 - Computation of gain (or) loss on early retirement of the bonds
Par value of the bonds	$840,000
Less: Discount on bonds payable at December 31, 2021                           [Refer working note 2]	$22,680
Carrying value (or) book value of the bonds at December 31, 2021	$817,320
Less: Amount paid to bondholders to reacquire the bonds     [Par value x 102% = $840,000 x 107%]	$856,800
Loss on bond retirement	($39,480)

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Note: To acquire the bonds from the bondholders, the company has paid an amount greater than the carrying value of the bonds. So, it incurred loss.

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Working Note 2 - Computation of balance of discount on bonds payable remaining at December 31, 2021
Par value of the bonds	$840,000
Issued value of the bonds                                                [Par value x 97% = $840,000 x 97%]	$814,800
Discount on bonds payable at January 1, 2021               [Par value - Issued value = $840,000 - $814,800]	$25,200
Less: Discount amortised for the year 2021                    [($25,200 / 10 years) x 1 years]	$2,520
Discount on bonds payable at December 31, 2021	$22,680