On June 30, 2011, Country Inc. had outstanding 10 percent, $1,000,000 face amount, 15-year bonds maturing on June 30, 2016. Interest is paid on June 30 and December 31, and bond discount and bond issue costs are amortized on these dates. The unamortized balances on June 30, 2011, of bond discount and bond issue costs were $55,000 and $20,000, respectively. Country reacquired all of these bonds at 96 on June 30, 2011, and retired them. Ignoring income taxes, how much gain or loss should Country record on the bond retirement?

Question

Quizplus · Accepted Answer

To calculate the gain or loss on retirement of bonds, we need to compare the carrying value (face value minus unamortized discount and issue costs) of the bonds to the amount paid to retire them.

Carrying value on June 30, 2011: 
Face value = $1,000,000 
Less: Unamortized discount = $55,000 
Less: Unamortized issue costs = $20,000 
Carrying value = $925,000

Amount paid to retire bonds: 
96% of face value = 0.96 x $1,000,000 = $960,000

Gain or loss = Carrying value - Amount paid 
= $925,000 - $960,000 
= Loss of $35,000

Therefore, the best choice is B) Loss of $35,000.