Riley Co. has outstanding $40 million face amount of 15% bonds that were issued on January 1, 1997, for $39,000,000. The 20-year bonds mature on December 31, 2016, and are callable at 102 (that is, they can be paid off at any time by paying the bondholders 102% of the face amount).
a. Under what circumstances would Riley Co. managers consider calling the bonds?
b. Assume that the bonds are called on December 31, 2009. Use the horizontal model (or write the journal entry) to show the effect of the retirement of the bonds. (Hint: calculate the amount paid to bondholders; then determine how much of the bond discount would have been amortized prior to calling the bonds; and then calculate the gain or loss on retirement.)
This solution discusses the circumstances under which a company would call its bonds. Using an Excel 97-2003 spreadsheet, it illustrates how to amortize the bond and how to record the retirement (including the related gain or loss) using the horizontal model (i.e., a journal entry).