Question

On january 1, year 1, fox corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. these bonds were to mature on january 1, year 11, but were callable at 101 any time after december 31, year 4. interest was payable semiannually on july 1 and january 1. on july 1, year 6, fox called all of the bonds and retired them. bond premium was amortized on a straight-line basis. before income taxes, fox's gain or loss in year 6 on this early extinguishment of debt was:

Answer 1

Amount of Premium to be amortised per interest payment=Total Premium/No of times interest will be paid over life of the bond

=40000/20

=$2000

No of Interest payments made upto 1st July Year 6=11 times

Premium Amortised upto 1st July=Amount of Premium to be amortised per interest payment*No of payments made upto 1st July, Year6

=2000*11

=$22000

Carrying amount of Bond as on 1sy July,Year 6= Face Value of Bond-Premium Amortised upto 1st July, Year 6

=1040000-22000

=$1018000

Gain/(Loss) on Amortisation=Amount Paid-Carrying Value of Bond

=1010000-1018000

=$8000