Redemption of Bonds

HARVARD Company issued $450,000 face value bonds at a premium of $7,000. The bonds contain a call provision of 98. HARVARD decides to redeem the bonds due to a significant decline in interest rates. On that date, HARVARD had amortized only $2,600 of the premium.

Required:

1. Calculate the gain or loss on the early redemption of the bonds. Enter the amount as positive number. Round your answer to the nearest whole dollar. $fill in the blank 1

GainLoss

2. Calculate the gain or loss on the redemption assuming that the call provision is 101 instead of 98. Enter the amount as positive number. Round your answer to the nearest whole dollar. $fill in the blank 3

GainLoss

3. Select where the gain or loss should be presented on the financial statements.

Income StatementBalance Sheet

4. Why is the call price is normally higher than 100?

Bonds are redeemed early only if it is advantageous to the

investorsissuing firm

. To compensate the

investorsissuing firm

for forgone interest, as well as for the costs and inconvenience involved, the call price is normally set at an amount higher than 100.