Ignoring income taxes compute the amount of loss, if any, to be recognized by Banno as a result of retiring the $900,000 of bonds in 2007 and prepare the journal entry to record the retirement.
On January 2, 2002, Banno Corporation issued $1,500,000 of 10% bonds at 97 due December 31, 2011. Legal and other costs of $24,000 were incurred in connection with the issue. Interest on the bonds is payable annually each December 31. The $24,000 issue costs are being deferred and amortized on a straight-line basis over the 10-year term of the bonds. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable “interest method”.) The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2007, Banno called $900,000 of the bonds and retired them.
To calculate the loss recognized by Banno as a result of retiring the bonds, you need to compare the carrying value of the bonds to the amount paid to retire them.
1. Calculate the carrying value of the bonds:
- Start with the initial issuance amount of $1,500,000.
- Subtract the discount on the bonds that has been amortized over the years. Since the discount is being amortized on a straight-line basis over 10 years, you can calculate the annual amortization as follows:
- Discount on bonds = (Face value of bonds - Initial issuance amount)
- Annual amortization = Discount on bonds / Number of years
- Multiply the annual amortization by the number of years that have passed (from 2002 to 2007) to get the total discount amortized.
- Subtract the deferred issue costs that have been amortized over the years. Since the issue costs are being amortized on a straight-line basis over 10 years, you can calculate the annual amortization as follows:
- Annual amortization of issue costs = Issue costs / Number of years
- Multiply the annual amortization by the number of years that have passed (from 2002 to 2007) to get the total issue costs amortized.
- Carrying value of the bonds = Initial issuance amount - Total discount amortized - Total issue costs amortized
2. Calculate the loss recognized:
- The loss is the difference between the carrying value of the retired bonds and the amount paid to retire them. Since the bonds are callable at 101% of the face amount, the amount paid to retire them is $900,000 * 101%.
3. Prepare the journal entry:
- Debit: Bonds payable (to remove the carrying value of the retired bonds)
- Debit: Loss on retirement of bonds (to record the loss recognized)
- Credit: Cash (to record the cash paid to retire the bonds)
Note: Since income taxes are being ignored, the entry doesn't need to include any tax-related accounts.
It is important to note that this explanation assumes a basic understanding of accounting principles and journal entry recording. If you are unfamiliar with these concepts, it may be helpful to consult an accounting professional or reference accounting resources for more guidance.