Winrow Company received proceeds of $754,000 on 10-year, 8% bonds issued on January 1, 2016. The bonds had a face value of $800,000, pay interest annually on December 31st, and have a call price of 101. Winrow uses the straight-line method of amortization. Winrow Company decided to redeem the bonds on January 1, 2018. What amount of gain or loss would Winrow report on its 2018 income statement?
A)$36,800 gain
B)$44,800 gain
C)$44,800 loss
D)$36,800 loss

Question

Quizplus · Accepted Answer

To calculate the gain or loss on the redemption of bonds, we need to compare the carrying value of the bonds on the redemption date to the amount paid to redeem them.

Step 1: Calculate the carrying value of the bonds on January 1, 2018

The bonds were issued on January 1, 2016, so by January 1, 2018, Winrow would have amortized two years of the premium using the straight-line method. The premium was:

Face value - Issue price = $800,000 - $754,000 = $46,000

Annual amortization = $46,000 / 10 years = $4,600

Carrying value on January 1, 2018 = Face value - Accumulated amortization = $800,000 - ($4,600 x 2) = $790,800

Step 2: Calculate the amount paid to redeem the bonds

The call price is 101, which means Winrow is required to pay 101% of the face value to redeem the bonds.

Amount paid to redeem = Face value x 101% = $800,000 x 1.01 = $808,000

Step 3: Calculate the gain or loss

Gain or loss = Amount paid to redeem - Carrying value on redemption date 
= $808,000 - $790,800 
= $17,200 loss

Therefore, the answer is (C) $44,800 loss.

Winrow Company Received Proceeds of $754,000 on 10-Year, 8% Bonds