Question

On January​ 1, 2018​, Patel Company issued $500,000 of 11​%, five​-year bonds payable at 102. Patel Company has extra cash and wishes to retire the bonds payable on January​1, 2019​, immediately after making the second semiannual interest payment. To retire the​ bonds, Patel pays the market price of 99.

1.	What is Patel Company's carrying amount of the bonds payable on the retirement​ date?
2.	How much cash must Patel Company pay to retire the bonds​ payable?
3.	Compute Patel Company's gain or loss on the retirement of the bonds payable ​(Assume bonds payable are amortized using the​ straight-line amortization​ method.)

Answer 1

1)	premium on bonds
	(500,000*2%)=			10000
	Amortization semiannually
	(10,000/10)			1,000
	Hence amortized in first year			1000*2
				2000
	Carrying value of bonds on the date of retirement
	Face value of bonds					500,000
	Add:Unamortized premium on bonds					8,000
	Carrying value of bonds on the date of retirement					508,000	answer
2)	Cash to be paid
	500,000*99%
	495000
3)	Gain or loss on retirement
	Carrying value of bonds on date of retirement					508,000
	Cash paid					495,000
	Gain on retirement					13,000	answer