Purchase Solution

# Using Straight-Line Amortization to Compute the Gain/Loss

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Hurst, Incorporated sold its 8% bonds with a maturity value of \$3,000,000 on August 1, 2009 for \$2,946,000. At the time of the sale, the bonds had 5 years until they reached maturity. Interest on the bonds is payable semiannually on August 1 and February 1. The bonds are callable at 104 at any time after August 1, 2011. By October 1, 2011, the market rate of interest has declined and the market price of Hurst's bonds has risen to a price of 101. The firm decides to refund the bonds by selling a new 6% bond issue to mature in 5 years. Hurst begins to reacquire its 8% bonds in the market and is able to purchase \$500,000 worth at 101. The remainder of the outstanding bonds is reacquired by exercising the bonds' call feature. In the final analysis, how much was the gain or loss experienced by Hurst in reacquiring its 8% bonds? (Assume the firm used straight-line amortization). Show calculations.

##### Solution Summary

The solution uses a straight-line amortization to compute the gain/loss experienced by Hurst in reacquiring bonds.

##### Solution Preview

Since bonds are purchased on discount, the discount would be amortized over the life of the bond
Face Value of Bonds \$3,000,000
Purchase Value of Bonds \$2,946,000
Discount on Bonds \$54,000
We are using straight line ...

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