A company issued $2,000,000 of bonds with a 20-year
maturity at 96. Seven years later, the company called the bonds at 103 when the unamortized discount
was $39,000. In the year the bonds were called, the company would most
likely report a loss of:
A $99,000.
B $138,000.
C $60,000
Solution -
A is correct. The loss is the difference between the redemption price and the carrying
amount.
Redemption cost $2,060,000 $2,000,000 × (103/100)
Carrying amount retired 1,961,000 $2,000,000 – $39,000
Loss on redemption $99,000
When we issue a bond at discount we add back the income to raise the bond to the par value and when there is a premium we amortize it and reduce the value to par. So when we are finding the loss here why have we deducted the discount from 200,000.