Brooks Company received proceeds of $188500 on 10-year 8% bonds issued on January 1 2015. The bonds had a face value of $200000 pay interest annually on January 1 and have a call price of 101. Brooks uses the straight-line method of amortization. Brooks Company decided to redeem the bonds on January 1 2017. What amount of gain or loss would Brooks report on its 2017 income statement?

A) $9200 gain
B) $11200 gain
C) $11200 loss
D) $9200 loss

Question

Manoj Mishra · Accepted Answer

Final Answer : C, Explanation :  To calculate the gain or loss on redemption, we need to compare the carrying value (the remaining balance on the bond liability account after amortization) with the redemption price.Step 1: Calculate the carrying value of the bonds on January 1, 2017:The bonds were issued on January 1, 2015, with a face value of $200,000 and an 8% coupon rate. This means that the annual cash interest payment is $16,000 ($200,000 x 8%).The bonds pay interest annually on January 1, so they would have paid interest twice by January 1, 2017:- On January 1, 2015, the company would have received $16,000 x 1 = $16,000 in interest.- On January 1, 2016, the company would have received another $16,000 x 1 = $16,000 in interest.The total cash received from interest payments is $32,000 ($16,000 + $16,000). Therefore, the remaining balance on the bond liability account after amortization is:Carrying value = Face value - Amortization of bond discount + Accrued interestCarrying value = $200,000 - ($188,500 - $200,000)/10 x 2 + $32,000Carrying value = $190,200Step 2: Calculate the redemption price:The bonds have a call price of 101, which means they can be redeemed at 101% of face value. The face value is $200,000, so the redemption price is:Redemption price = Face value x Call priceRedemption price = $200,000 x 1.01Redemption price = $202,000Step 3: Calculate the gain or loss on redemption:To calculate the gain or loss on redemption, we need to compare the carrying value with the redemption price:Gain or Loss = Redemption price - Carrying valueGain or Loss = $202,000 - $190,200Gain or Loss = $11,800Since the company has a loss on redemption, the answer is C) $11,200 loss.

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