On January 2, 2011, Oakwood, Inc., purchased $800,000 of 10 percent, 10-year bonds for $872,000. The bonds pay interest on January 1 and July 1 of each year. Oakwood uses straight-line amortization for all premiums or discounts. On July 1, 2014, Oakwood sold the bonds for $832,000. How much gain or loss should Oakwood record on the sale?

Question

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Oakwood paid $872,000 for bonds with a face value of $800,000, resulting in a premium of $72,000. The bonds were held for 3 years (6 interest payments), so the premium was amortized by $12,000 per year ($72,000 ÷ 6). As of July 1, 2014, the accumulated amortization on the premium was $36,000 ($12,000 × 3). 
The carrying value of the bonds on July 1, 2014 was: 
$800,000 (face value) + $72,000 (premium) - $36,000 (amortization) = $836,000 
Since Oakwood sold the bonds for $832,000, a loss of $4,000 was incurred. However, the premium amortized to date must be added back to the loss to determine the total gain or loss on the sale: 
$832,000 (sale proceeds) - $836,000 (carrying value) + $36,000 (amortized premium) = $32,000 loss.