Early Extinguishment of Debt on August 1, 2012, Fresno Inc

question 182

Essay

Early extinguishment of debt On August 1, 2012, Fresno Inc.sold 8%, five year bonds with a maturity value of $2,000,000 for $1,964,000.Interest on the bonds is payable semi-annually on August 1 and February 1.The bonds are callable at 104 at any time after August 1, 2014.By October 1, 2014, the market rate of interest has declined, and the market price of Fresno's bonds has increased to 102.The company decides to refund the bonds by selling a new 6% bond issue to mature in five years. Fresno begins to reacquire its 8% bonds in the market and is able to purchase $600,000 worth Long-Term Financial Liabilities 14- 29 at 102.The remainder of the outstanding bonds are acquired by exercising the bond call feature. Instructions Calculate Fresno's total gain or loss in reacquiring the 8% bonds.Assume the company uses straight-line amortization.Show calculations.

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Definitions:

Memory Function

The processes involved in encoding, storing, and retrieving information.

Hindsight Bias

The tendency to believe, after an event has occurred, that one would have foreseen or predicted the outcome.

Egocentric

Having or regarding the self or the individual as the center of all things.

Stereotypical

Relating to a widely held but fixed and oversimplified image or idea of a particular type of person or thing.