Problem: Riley Co has an outstanding $40million face amount of 15% bonds that were issued on January 1. 1998 for $39,000,000. The 20 year bonds mature on December 31, 2017, and are callable at 102 (that is they can be paid off at any time by paying the bondholders 102% of face amount).
Required.
1) Under what circumstances would Riley Co. Managers consider calling the bonds?
2) Assume that the bonds are called December 31, 2010. Use the horizontal model (or write the journal entry) to show the effect of 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 the calculate the gain or loss on retirement.)