Question

On January 2, 2015, Martinez Corporation issued $1,700,000 of 10% bonds at 97 due December 31, 2024. Interest on the bonds is payable annually each December 31. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable "interest method.")The bonds are callable at 102 (i.e., at 102% of face amount), and on January 2, 2020, Martinez called $1,020,000 face amount of the bonds and redeemed them.

Required:
Compute the amount of loss, if any, to be recognized by Martinez as a result of retiring the $1,020,000 of bonds in 2020.

Answer 1

Answer: Loss of $35,700

Explanation:

Profit (Loss) = Par Value - Unamortized discount - Amount bond was called at.

Amount bond was called at;

In 2020 Martinez called in  $1,020,000 of the bonds at 102% of the value so they paid;

=  1,020,000 * 102%

= $‭1,040,400‬

Unamortized discount

Because Martinez issued the bond at a discount to par, they will have to account for this difference between the par and price. This will be the Unamortized discount and will have to be apportioned per year.

Unamortized discount = Par Value * ( 1 - percent of par value sold at)

= 1,020,000 * ( 1 - 97)

= $30,600

Apportioned over 10 years = 30,600/ 10

= $3,060

5 years have elapsed so = 5 * 3,060

= $15,300

Profit (Loss) = Par Value - Unamortized discount - Amount bond was called at

= 1,020,000 - 15,300 - ‭1,040,400‬

= ($35,700)