LONG TERM LIABILITIES 2 answers below »


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On January 2, 2005, Drew Company issued 9% term bonds dated January 2, 2005, at an effective annual interest rate of 10%. Drew uses the effective interest method of amortization. On July 1, 2007, the bonds were extinguished early when Drew acquired them in the open market for a price greater than face amount.

On September 1, 2007, Drew issued for cash 7% nonconvertible bonds dated September 1, 2007, with detachable stock purchase warrants. Immediately after issuance, both the bonds and the warrants had separately determined market values.


1. Were the 9% term bonds issued at face amount, at a discount, or at a premium? Why?

2. Would the amount of interest expense for the 9% term bonds using the effective interest method of amortization be higher in the first or second year of the life of the bond issue? Why?

3. How should gain or loss on early extinguishment of debt be determined? Does the early extinguishment of the 9% term bonds result in a gain or loss? Why?

4. How should Drew report the early extinguishment of the 9% term bonds on the 2007 income statement?

5. How should Drew account for the issuance of the 7% nonconvertible bonds with detachable stock purchase warrants?