Question

Cupola Fan Corporation issued 10%, $600,000, 10-year bonds for $570,o00 on June 30, 2021. Debt issue costs were $3,500. ...


Cupola Fan Corporation issued 10%, $600,000, 10-year bonds for $570,o00 on June 30, 2021. Debt issue costs were $3,500. Interest is paid semiannually on December 31 and June 30. One year from the issue date (July 1, 2022), the corporation exercised its call privilege and retired the bonds for $575,000. The corporation uses the straight-line method both to determine interest expense and to amortize debt issue costs.
Transcribed: Cupola Fan Corporation issued 10%, $600,000, 10-year bonds for $570,o00 on June 30, 2021. Debt issue costs were $3,500. Interest is paid semiannually on December 31 and June 30. One year from the issue date (July 1, 2022), the corporation exercised its call privilege and retired the bonds for $575,000. The corporation uses the straight-line method both to determine interest expense and to amortize debt issue costs.

Answer

Bonds refers to the fixed income debt which represents loan made by an investor to a borrower. It is used by the government ,companies, municipalities etc. Debt holders, creditors or issuers are the owners of bonds.

 

Working Note:

 

  • Interest is computed by :

            $ 600,000 ×10100 = $ 60,000 per annum.

            $ 60,000 / 2 as interest paid is semi -annual on ever 31 December and 30 June.

  • Discount = $ ( 600,000- 570,000)

                         = $ 30,000

  • Discount + Debt Issue Cost = $ ( 30,000+ 3,500)

                                                      = $ 33,500.

  • Amortization amount per annum = $ 33,500 ×10100

                                                                = $ 3,350

  • Semi -annual amortization amount = $ 3,350/2

                                                                   = $1,675

  • Bond Payable = $ ( 570,000 + 1,675 + 1,675)

                                =$ 573,350

  • Loss on early extinguishment =  $ ( 575,000- 573,350)

                                                         =$ 1,650

 

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