The 10% bonds payable of Klein Company had a net carrying amount of $570,000 on December 31, 2006. The bonds, which had a face value of $600,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On July 2, 2007, several years before their maturity, Klein retired the bonds at 102. The interest payment on July 1, 2007 was made as scheduled. What is the loss that Klein should record on the early retirement of the bonds on July 2, 2007? Ignore taxes
Calculation of loss to be recorded on the early retirement of bond :-
= (600000 * 102 % - 570000) - 10 % of (600000 * 102 % - 570000).
= (612000 - 570000) - 10 % of (612000 - 570000).
= 42000 - 10 % of 42000.
= 42000 - 4200
= $ 37,800.
Conclusion :- Loss to be recorded on early retirement of bond in the given question = $ 37,800
$37800
Well, well, well, looks like Klein Company decided to break up with their bonds before their maturity. That's a bold move, Klein! Now, let's crunch some numbers and figure out the loss they should record.
First things first, we need to find out the carrying amount of the bonds on July 2, 2007. Since we're using the effective-interest method, we'll need to calculate the accumulated amortization of the bond discount up until that date.
To do that, we divide the bond discount ($600,000 - $570,000 = $30,000) by the number of interest periods (usually semi-annual payments, so let's say that's 2 for simplicity's sake). That gives us $15,000 of amortization per interest period.
Next, we need to find out how many interest periods have passed from the issuance of the bonds until July 2, 2007. Assuming the bonds were issued on January 1, 2007, that gives us six months or one interest period.
So, the total amortization up to July 2, 2007 is $15,000.
Now, let's move on to figuring out the carrying amount. We take the net carrying amount on December 31, 2006 ($570,000) and subtract the accumulated amortization ($15,000). That leaves us with $555,000 as the carrying amount on July 2, 2007.
Since Klein retired the bonds at 102, they received 102% of the face value ($600,000). That amounts to $612,000.
Finally, we subtract the carrying amount on July 2, 2007 ($555,000) from the amount they received on the retirement of the bonds ($612,000). Drumroll, please!
The loss that Klein should record on the early retirement of the bonds on July 2, 2007, is $57,000.
So, it seems like breaking up with their bonds cost Klein quite a bit. Hopefully, they learned their lesson and won't rush into any more financial relationships.
To calculate the loss that Klein should record on the early retirement of the bonds on July 2, 2007, we need to follow these steps:
Step 1: Determine the carrying value of the bonds on July 2, 2007.
The carrying value of the bonds on July 2, 2007, can be calculated by subtracting the unamortized discount from the face value of the bonds:
Carrying Value on July 2, 2007 = Face Value - Unamortized Discount
Step 2: Calculate the unamortized discount on July 2, 2007.
To find the unamortized discount, we need to determine the cumulative amount of discount that has not been amortized up to July 2, 2007:
Unamortized Discount = (Discount per Period) x (Number of Remaining Periods)
Step 3: Determine the discount per period.
The discount per period is calculated by subtracting the bond's carrying amount from the bond's face value and dividing it by the total number of interest periods:
Discount per Period = (Face Value - Net Carrying Amount) / Total Number of Interest Periods
Step 4: Calculate the number of remaining periods.
To find the number of remaining periods, we need to determine the total number of interest periods from the issue date to the expected maturity date and subtract the number of periods that have already passed:
Number of Remaining Periods = Total Number of Interest Periods - Number of Periods Passed
Step 5: Calculate the total number of interest periods.
The total number of interest periods can be calculated by multiplying the number of years from the bond's issue date to its maturity date by the number of interest payments per year:
Total Number of Interest Periods = Number of Years x Number of Interest Payments per Year
Step 6: Calculate the loss on early retirement.
The loss on early retirement is the difference between the carrying value and the redemption price:
Loss on Early Retirement = Redemption Price - Carrying Value
Let's calculate the loss step by step:
Step 1: Determine the carrying value of the bonds on July 2, 2007.
Carrying Value on July 2, 2007 = $600,000 - $570,000 = $30,000
Step 2: Calculate the unamortized discount on July 2, 2007.
To calculate the unamortized discount, we need to determine the discount per period and the number of remaining periods.
Discount per Period = ($600,000 - $570,000) / (2 x Number of Interest Payments per Year) = $15,000
Number of Remaining Periods = Total Number of Interest Periods - Number of Periods Passed = (2 x Number of Interest Payments per Year) - 1
Step 3: Determine the discount per period.
Discount per Period = $15,000
Step 4: Calculate the number of remaining periods.
Number of Remaining Periods = (2 x Number of Interest Payments per Year) - 1
Step 5: Calculate the total number of interest periods.
Total Number of Interest Periods = Number of Years x Number of Interest Payments per Year
Step 6: Calculate the loss on early retirement.
Loss on Early Retirement = Redemption Price - Carrying Value
Please provide the number of interest payments per year and the number of years to complete the calculations.
To determine the loss that Klein Company should record on the early retirement of the bonds on July 2, 2007, we need to calculate the carrying value of the bonds on that date and compare it to the amount paid for their retirement.
Here's how you can calculate the carrying value of the bonds on July 2, 2007:
1. Determine the unamortized bond discount: This is the portion of the bond discount that has not yet been accounted for. Since the bonds were retired before maturity, there will still be some unamortized discount remaining.
To calculate the unamortized bond discount, we need to consider the bond discount rate, the face value of the bonds, and the remaining period until maturity. In this case, the bond discount rate is 12% and the face value is $600,000.
Calculate the interest expense for the remaining period until maturity:
Bond discount rate = 12%
Face value of the bonds = $600,000
Remaining period until maturity = Number of interest payments remaining = 5 (since the bonds were retired on July 2, 2007, and interest is paid on January 1 and July 1 of each year)
Interest expense = Face value * Bond discount rate * Remaining period until maturity
Interest expense = $600,000 * 12% * 5
2. Subtract the unamortized bond discount from the net carrying amount: The net carrying amount of the bonds on December 31, 2006, was given as $570,000. Since the bond discount reduces the carrying amount, subtract the unamortized bond discount calculated in step 1 from the net carrying amount.
Carrying value on July 2, 2007 = Net carrying amount - Unamortized bond discount
Now that we have the carrying value on July 2, 2007, we can calculate the loss by comparing it to the amount paid for the retirement of the bonds.
3. Calculate the loss on retirement: The bonds were retired at 102, which means they were purchased for 102% of their face value.
Amount paid for retirement = Face value * Retirement price
Amount paid for retirement = $600,000 * 102%
Loss on retirement = Carrying value on July 2, 2007 - Amount paid for retirement
By following these steps, you can determine the loss that Klein Company should record on the early retirement of the bonds on July 2, 2007.