Q10SE_1 - Horngren'S Financial And Managerial Accounting

Question

Retiring bonds payable before maturity

On January 1, 2018, Powell Company issued $350,000 of 10%, five-year bonds

payable

at 102. Powell 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, Powell Company pays the market price of 98.

Requirements

1. What is Powell Company’s carrying amount of the bonds payable on the

retirement

date?

2. How much cash must Powell Company pay to retire the bonds payable?

3. Compute Powell Company’s gain or loss on the retirement of the bonds

payable.

Step-by-Step Solution

Answer

Answer:

The carrying amount of the bonds on retirement is $348,600.

Step 1: Definition of bond maturity

The due date of the bonds is known as the maturity of the bonds.

Step 2: Calculation of the bond amortization

Premium on bonds = $7,000

$$\begin{gathered} \mathit{A}\mathit{m}\mathit{o}\mathit{r}\mathit{t}\mathit{i}\mathit{z}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathit{o}\mathit{f}\mathit{b}\mathit{o}\mathit{n}\mathit{d}\mathit{s}\mathbf{=}\frac{\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\mathbf{o}\mathbf{f}\mathbf{p}\mathbf{r}\mathbf{e}\mathbf{m}\mathbf{i}\mathbf{u}\mathbf{m}}{\mathbf{N}\mathbf{u}\mathbf{m}\mathbf{b}\mathbf{e}\mathbf{r}\mathbf{o}\mathbf{f}\mathbf{p}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{o}\mathbf{d}\mathbf{s}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{000}}{\mathbf{10}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{700} \end{gathered}$$

Hence the semi-annual amortization of the bods is $700.

Annual bond amortization is $1,400

Step 3: calculation of the carrying amount

Carrying amount of the bonds
Face Value of Bonds	$350,000
Add: The first-year bond amortization	($1,400)
Carrying amount on the retirement of bonds		$348,600