On 1 May 2017,Metro Company has debentures with balances as shown below. If Metro redeems the debentures for $52 000,what will be the effect on the income statement?
A) There will be sales revenue of $3 140.
B) There will be a gain on redemption of $3 140.
C) There will be a loss on redemption of $3 140.
D) There will be no effect on profit.

Question

On 1 May 2017,Metro Company has debentures with balances as shown below.  If Metro redeems the debentures for $52 000,what will be the effect on the income statement?
A) There will be sales revenue of $3 140. 
B) There will be a gain on redemption of $3 140. 
C) There will be a loss on redemption of $3 140. 
D) There will be no effect on profit.

Quizplus · Accepted Answer

Redeeming the debentures for $52,000 means that Metro will be paying off the debtholders at a premium of $3,140 ($52,000 - $48,860). This premium payment represents a loss on redemption for Metro, and will be reflected on the income statement as an expense. Therefore, the correct answer is (C) there will be a loss on redemption of $3,140.

On 1 May 2017,Metro Company Has Debentures with Balances as Shown