Year | 5% Bonds | 11% Bonds | 1975 | $1.695 | $2.233 | 1976 | $1.695 | $2.233 | 1977 | $1.695 | $2.233 | 1978 | $1.695 | $2.233 | 1979 | $1.695 | $2.233 | 1980 | $1.695 | $2.233 | 1981 | $1.695 | $2.233 | 1982 | $1.695 | $2.233 | 1983 | $1.695 | $2.233 | 1984 | $1.695 | $2.233 | 1985 | $1.695 | $2.233 | 1986 | $1.695 | $2.233 | 1987 | $1.695 | $2.233 | 1988 | $35.595* | $22.533* |
*Face value and interest
(In millions) 1. $33.9 million (Face value) X 5% (Coupon rate) = $1,695,000

2. $20.3 million (Face value) X 11% (Coupon rate) = $2,233,000

3. Assume that 11% is the market rate of interest in on January 1, 1975. Compute the present value at January 1, 1975 of all payments that will be made on
In my opinion, this increased net income affected the company’s stock price because potential investors will review the financial statement at the end of every year and they will invest more money into the company. Therefore, I think both company and bondholders have benefits from the transaction. 2. The author appears to agree with Philip Defliese that the gain should be amortized over the remaining life of the debt. Do you agree? Why or why not? What would amortization accomplish? If you do not agree, what accounting treatment do you think is most appropriate?

I do not agree with Philip Defliese, because General Host received one-time gain on the exchange of their bonds. For example, we discussed gain/loss on disposal assets in an earlier chapter. If a company disposes of one of their assets, it will be recorded for gain/loss on income statement, not amortizing their gains or losses. However, a company has to pay taxes on disposal assets or it will get tax benefits from loss. As I mentioned in the example above, General Host has to pay tax because the company has a huge gain on exchange