Problem $3(10$ Marks$)$

On August $1,2021,$ 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

$1,2023.$ By October $1,2023,$ 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 at $105.$ The remainder of the outstanding bonds are acquired by exercising

the bond call feature.

Instructions

a$)$ Calculate Fresno$$s total gain or loss in reacquiring the $8\%$ bonds. Assume

the company uses straight$-$line amortization. Show calculations.

b$)$ CRITICAL THINKING: Frezno$$s CFO is reviewing your calculations for the

bond redemption and has a few questions regarding your methodology.

Explain the accounting procedures for the early redemption of bonds