| Course | AC301 Intermediate Accounting II |
|---|---|
| Unit | Unit 5 |
| Paper type | Debt retirement problem |
| Length | About 660 words, 5 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | BS in Accounting |
| Updated | October 2026 |
Free sample paper for AC301 Unit 5
A Call at 102 and a Buyback at 97: A Unit 5 Debt Retirement Problem for a Ski Resort Operator
[Student Name]
Purdue University Global
AC301: Intermediate Accounting II
Unit 5 Debt Retirement Problem
[Instructor Name]
[Date]
Whitecap Ridge Resorts, its two bond issues and every amount are composite; the opinion, statement and textbook cited are real.
The Rule
When debt is settled early, whatever separates the cash paid from the net carrying amount of the debt, face value adjusted for any unamortized premium, discount and issue costs, is recognized as a gain or loss in the period of retirement (Accounting Principles Board, 1972). The carrying amount must first be brought up to date, because amortization since the last interest date belongs to the debt being retired.
Retirement A: Calling the 8 Percent Bonds
Whitecap issued $5,000,000 of ten-year, 8 percent bonds six years ago, when rates were high, at a discount that priced them to yield about 8.5 percent. Interest is paid June 30 and December 31. The indenture allows a call at 102 after five years. Market rates for Whitecap's debt are now about 6 percent, so on June 30 the resort calls the whole issue.
Bringing the discount up to date:
1. Unamortized discount on January 1: $96,019.
2. Amortization for January 1 to June 30 under the effective interest method, 4.25 percent of the $4,903,981 carrying amount less the $200,000 coupon: $8,419.
3. Unamortized discount on June 30: $87,600.
Entry for the final interest payment, June 30: Interest Expense, debit $208,419; Discount on Bonds Payable, credit $8,419; Cash, credit $200,000.
Measuring the call:
1. Face value: $5,000,000.
2. Less unamortized discount: $87,600.
3. Net carrying amount: $4,912,400.
4. Cash paid at 102: $5,100,000.
5. Loss on redemption: $187,600.
Entry: Bonds Payable, debit $5,000,000; Loss on Redemption of Bonds, debit $187,600; Discount on Bonds Payable, credit $87,600; Cash, credit $5,100,000.
Retirement B: Buying Back Part of the 5 Percent Bonds
Whitecap also has $3,000,000 of 5 percent bonds sold when rates were lower, at a premium. Because the market now asks about 6 percent, those bonds trade below face. On December 31, an interest date, after recording that day's interest and amortization, the issue is carried at $3,060,000, including a $60,000 premium. Whitecap buys $1,000,000 of face on the open market at 97.
1. Share retired: $1,000,000 of $3,000,000, one third.
2. Carrying amount retired: one third of $3,060,000, $1,020,000, of which $20,000 is premium.
3. Cash paid at 97: $970,000.
4. Gain on repurchase: $50,000.
Entry: Bonds Payable, debit $1,000,000; Premium on Bonds Payable, debit $20,000; Cash, credit $970,000; Gain on Repurchase of Bonds, credit $50,000.
The same rise in market rates that makes the 8 percent issue worth calling makes the 5 percent issue cheap to buy back, which is why one retirement produces a loss and the other a gain in the same year.
Was the Call Worth It?
The accounting loss overstates the economic cost. Of the $187,600, $87,600 is discount that would have been charged to interest expense over the next four years anyway; only the $100,000 call premium is new cash. If Whitecap funds the call with new 6 percent debt of $5,100,000, annual interest falls from $400,000 to $306,000, saving $94,000 a year for the four years the old bonds had left. Those savings exceed the premium within about thirteen months, before any discounting, so the call makes financial sense even though it reduces this year's income.
Presentation
Both results are reported in income from continuing operations, usually in other income and expense. They are not extraordinary items; that treatment for debt extinguishments ended in 2002 (Financial Accounting Standards Board, 2002). The notes describe each retirement and the remaining $2,000,000 of the 5 percent issue, carried at $2,040,000. Analysts often adjust for the loss and gain when comparing the resort's earnings year to year, because neither will recur (Kieso et al., 2019).
References
Accounting Principles Board. (1972). Early extinguishment of debt (APB Opinion No. 26). American Institute of Certified Public Accountants.
Financial Accounting Standards Board. (2002). Rescission of FASB Statements No. 4, 44, and 64, amendment of FASB Statement No. 13, and technical corrections (Statement of Financial Accounting Standards No. 145). https://www.fasb.org
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting (17th ed.). Wiley.
Reading the AC 301 Unit 5 instructions
The fifth AC301 unit covers extinguishment of debt, and the problem usually pairs a call with an open-market purchase or a refunding. Begin with the rule: the gain or loss is the difference between cash paid and the net carrying amount on the retirement date. Bring amortization up to that date first and show the entry. Lay out each retirement with the same lines, face, unamortized premium or discount, carrying amount, cash and result, so the grader can compare them. For a partial retirement, remove only the matching share of the premium or discount. Record each retirement. Explain why one result is a loss and the other a gain, usually through the market rate. Where the instructions ask whether retiring the debt was sensible, compare the cash cost with the interest saved. Close with presentation. Cite APB 26, SFAS 145 and the textbook in APA 7.
How this AC301 Unit 5 example is built
The sample opens with the rule and the reason for updating amortization. Retirement A states the 8 percent issue's terms and the 102 call, then brings the discount from $96,019 to $87,600 with a June 30 interest entry. Five lines measure the call, and the entry records the $187,600 loss. Retirement B explains why the 5 percent bonds trade below face, takes one third of the $3,060,000 carrying amount, and records the $50,000 gain. The highlighted sentence ties both results to the same market rate. A section on economics separates the $100,000 cash premium from the $87,600 of discount that would have reached expense anyway, then compares annual interest of $400,000 with $306,000 on new debt. The presentation section places both results in continuing operations and reports the remaining 5 percent bonds at $2,040,000.
Reading the AC301 Unit 5 grading rubric
In this AC301 problem, the carrying amount on the retirement date is the number that decides the grade, because both results depend on it. Bringing amortization up to date is credited separately, with its entry. Each retirement entry must remove the bonds, the related premium or discount and record cash and the result. A partial retirement is checked for the proportional share of the premium. Explaining why the market rate produces a loss on one issue and a gain on the other earns analytical credit. An economic comparison of the call premium with interest savings shows judgment beyond the entries. Presentation in continuing operations, not as an extraordinary item, earns a point that older textbooks sometimes miss. Laying both retirements out in matching blocks helps the grader find each figure. At Purdue Global, APB 26 and SFAS 145 belong in the APA 7 reference list for this unit.
AC301 Unit 5 help from the desk
The most common error in debt retirement problems is computing the gain or loss from a stale carrying amount, skipping the amortization since the last interest date. Students also remove the entire premium on a partial repurchase. The call premium is treated as the whole loss, with the unamortized discount ignored. Gains and losses are reported as extraordinary, a category that no longer applies to debt. Some papers record the call price as the bonds' face. Others do not explain how a company can show a loss and still save money, which is often the question that earns the most credit. Accrued interest between payment dates is mishandled when a retirement falls mid-period. If your problem involves a refunding with new bonds or a conversion, a writer can lay out each step and the entries.
Get an AC301 Unit 5 example written to your instructions
Retirements differ in date and price, so the Unit 5 details that matter most are the call or purchase price, the retirement dates, the issue terms and any amortization already recorded. With the rubric attached, each retirement is worked carrying amount first, then entry and placement. Expect it in 24-48h; a first custom sample is free. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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AC301 Unit 5 questions, answered
Why would a company accept a loss to retire bonds early?
Because the loss is often smaller than the interest saved. If market rates have fallen, refinancing at a lower rate reduces future interest payments, and the call premium plus the unamortized discount is the price of doing so. Many AC301 problems ask for a sentence on this, and the sample adds one after the call block comparing the loss with the interest the old bonds would have cost.
Do unamortized issue costs affect the loss?
Yes. Current rules net issue costs against the debt itself, so any unamortized balance lowers the carrying amount on the retirement date and enlarges the loss. Problems written before that change sometimes show issue costs as a separate asset written off at retirement; the total loss is the same, reported in one line or two. Either presentation works as long as it matches the problem's.
How is a gain possible when bonds are bought back below face?
When market rates rise, bonds already outstanding fall in price, and a company can repurchase its own debt for less than its carrying amount. The difference is a gain on extinguishment. In this problem the resort buys at 97 while carrying the bonds above face because of their premium, so the gain reflects both the price decline and the premium removed.
Where can I find a free AC301 Unit 5 sample paper?
This page holds a complete AC301 Unit 5 debt retirement problem for a composite ski resort, with a call at 102, a repurchase at 97, both entries, an economic test of the call and APA 7 references.
Was the bond call worth it in the AC301 Unit 5 sample?
Yes. The resort paid a $100,000 call premium but saves $94,000 a year in interest for the four years the old bonds had left. The rest of the $187,600 loss is discount it would have expensed anyway.