On January 1, 2010, Goll Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2020 but were callable at 101 any time after December 31, 2013. Interest was payable semiannually on July 1 and January 1. OnJuly 1, 2015, Goll called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Goll's gain or loss in 2015 on this early extinguishment of debt was

Question

Quizplus · Accepted Answer

The gain on early extinguishment of debt is calculated by comparing the carrying amount of the bonds at the time of redemption to the redemption price. The bonds were issued at a premium ($2,080,000 for bonds with a face value of $2,000,000), and the premium is amortized over the life of the bonds. By July 1, 2015, 5.5 years of the 10-year term have passed, so more than half of the premium has been amortized. The redemption price is 101% of the face value, or $2,020,000 (101% of $2,000,000). The carrying amount is less than the redemption price, resulting in a gain. The exact gain depends on the amount of premium amortized by the redemption date, but without the precise amortization calculation, we know the gain is due to the carrying amount being lower than the redemption price.