**Example Problem: Calculating Gain or Loss on Bond Retirement****Problem Statement:**Tarazi Company issued bonds with a coupon rate of 10% and a face amount of $200,000. The bonds mature in 15 years. The market interest rate for bonds with the same degree of riskiness is 8% compounded annually. These bonds were issued on January 1 of Year 1 at a price of $234,238. Coupon payments are made annually on December 31, so the first coupon payment was made on December 31 of Year 1. As of December 31 of Year 2, the carrying value of the bonds is $231,615. These bonds were retired on December 31 of Year 2, just a few minutes after the second coupon payment was made. The total amount paid to retire these bonds was $250,000. How much gain or loss is recorded when these bonds are retired?**Options:**- Loss of $18,638- Loss of $18,385- Loss of $231,615- Gain of $18,638- Gain of $18,385- Gain of $200,000**Solution:**To find the gain or loss on retirement:1. Determine the carrying value of the bonds as of December 31 of Year 2: $231,6152. Compare it to the amount paid to retire the bonds: $250,0003. Calculate the loss: $250,000 - $231,615 = $18,385**Correct Answer: Loss of $18,385**

The journal entries are given as,

oupon payments are made annually on Decer made on December 31 of Year 1. As of Dece bonds is $231,615. These bonds were retired ter the second coupon payment was made. TI as $250,000. How much gain or loss is recorde

oupon payments are made annually on Decer made on December 31 of Year 1. As of Dece bonds is $231,615. These bonds were retired ter the second coupon payment was made. TI as $250,000. How much gain or loss is recorde

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

**Example Problem: Calculating Gain or Loss on Bond Retirement**

**Problem Statement:**

Tarazi Company issued bonds with a coupon rate of 10% and a face amount of $200,000. The bonds mature in 15 years. The market interest rate for bonds with the same degree of riskiness is 8% compounded annually. These bonds were issued on January 1 of Year 1 at a price of $234,238. Coupon payments are made annually on December 31, so the first coupon payment was made on December 31 of Year 1. As of December 31 of Year 2, the carrying value of the bonds is $231,615. These bonds were retired on December 31 of Year 2, just a few minutes after the second coupon payment was made. The total amount paid to retire these bonds was $250,000. How much gain or loss is recorded when these bonds are retired?

**Options:**

- Loss of $18,638
- Loss of $18,385
- Loss of $231,615
- Gain of $18,638
- Gain of $18,385
- Gain of $200,000

**Solution:**

To find the gain or loss on retirement:

1. Determine the carrying value of the bonds as of December 31 of Year 2: $231,615
2. Compare it to the amount paid to retire the bonds: $250,000
3. Calculate the loss: $250,000 - $231,615 = $18,385

**Correct Answer: Loss of $18,385**

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