Harper Co. has outstanding $100 million of 5% bonds, due in 7 years, and callable at 102. The bonds were issued at par and are selling today at a market price of 92. If Harper Co. retires $10 million of these bonds by purchasing them from bondholders at current market price, the company will report?
To determine the impact of retiring $10 million of bonds on Harper Co.'s financial statements, we need to consider the difference between the book value and market value of the bonds.
1. Calculate the book value of the bonds:
The bond's book value refers to its carrying value in the company's financial statements. Given that the bonds were issued at par, the book value would be their initial face value, which is $100 million.
2. Calculate the loss on retirement:
Since Harper Co. intends to retire $10 million worth of bonds, it will repurchase them from bondholders at the current market price of 92. The difference between the book value and the market value of the retired bonds represents a loss for the company.
Loss on retirement = Face value of the retired bonds - Purchase price of the retired bonds
Loss on retirement = ($10 million) - ($10 million * 92%) = $800,000
3. Record the impact on financial statements:
The loss on retirement of bonds needs to be recorded in the income statement, which will reduce Harper Co.'s net income. As a result, the company's financial statements will report a decrease in net income by $800,000.
Please note that this is a general explanation, and it's always advisable to consult with an accountant or financial professional for specific and accurate information regarding financial reporting.