A corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of $1520000. To extinguish this debt, the company had to pay a call premium of $440000. How should these amounts be treated for accounting purposes?

Question

23-02-2024
Mathematics

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A corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of $1520000. To extinguish this debt, the company had to pay a call premium of $440000. How should these amounts be treated for accounting purposes?

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squashedpizza squashedpizza · Answer 1 · 2024-02-23T16:43:55+01:00

Answer:

Step-by-step explanation:

For accounting purposes, the treatment of the outstanding bond obligation, unamortized discount, and call premium can be explained as follows:

1. **Outstanding Bond Obligation**:

- The outstanding bond obligation should be removed from the company's books. This involves recording the payment made to settle the bond early.

2. **Unamortized Discount of $1,520,000**:

- The unamortized discount of $1,520,000 should be amortized over the remaining life of the bond. Since the bond is being called early, the unamortized discount needs to be recognized as an expense immediately.

3. **Call Premium of $440,000**:

- The call premium of $440,000 is an additional cost incurred by the company to retire the bond early. This amount should be treated as an expense in the period when the bond is called. In summary, for accounting purposes:

- The outstanding bond obligation should be removed from the books. - The unamortized discount of $1,520,000 should be recognized as an expense immediately.

- The call premium of $440,000 should also be treated as an expense in the period when the bond is called. These accounting treatments ensure that the company accurately reflects the costs associated with retiring the bond early in its financial statements.