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On January 1, 2013, Springs Industries issued $18,000,000 of 10% ten-year bonds at 102. The bonds are callable at the option of Springs at 104. Springs pays interest annually and has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective-interest method). On December 31, 2019, Springs called in $6,000,000 of the bonds. Ignoring income taxes, Springs should report a gain or loss of:_________

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Tundexi

Answer:

Springs should report a loss of $204,000

Explanation:

To be redeemed Premium on bonds payable = 6,000,000 * 2% = $120,000

The amortization of bond premium (annual) = 120,000/10 = $12,000

Bonds premium amortized in 7 years (From 2013 to 2019) = 12,000 * 7 = $84,000

Unamortized bond premium = 120,000 - 84,000 = $36,000

Carrying value of bonds = Face value of the bonds + un-amortized bond premium at the redemption date = 6,000,000 + 36,000 = $6,036,000

Redemption price of bonds = 6,000,000 * 104% = $6,240,000

Loss on bonds redemption = Redemption price - Carrying value of bonds = 6,240,000 - 6,036,000 = $204,000. So, Springs should report a loss of $204,000.

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