Please help me to understand this example. In my opinion, if the carrying value is 4.5, the repurchased price is 2.1.
On December 12, 2014, the Company issued $25 million of unsecured bonds… Interest on the bonds is equal to Libor plus 4%, payable quarterly in arrears. … During the 4th quarter of 2018, the Company repurchased the unsecured bonds with a face value of $4.5 million and realized a $2.3 million gain.
- The balance in bonds payable was reduced at redemption by:
Solution to 1:
C is correct. The bonds payable is reduced at redemption by the carrying amount of the bonds redeemed. The cash paid to extinguish the bonds plus the gain on redemption equals the carrying amount of the bonds. The carrying amount of the bonds was $4,500,000. In this case, the carrying amount equals the face value. The company recognised a gain of $2,345,000 when it extinguished the debt of $4,500,000 by paying only $2,155,000.
- How much cash did the Company pay to redeem the bonds?
Solution to 2:
A is correct. As shown in the Statement of Cash flow, the company paid $2,155,000 to redeem the bonds. The company recognised a gain of $2,345,000 when it extinguished the debt of $4,500,000 by paying only $2,155,000.