Bay Company acquires 60, 8%, 5 year, $1,000 Community bonds on January 1, 2014 for $60,000. If Bay sells all of its Community bonds for $64,500, what gain or loss is recognized?

Question

Quizplus · Accepted Answer

Bay Company acquired 60 Community bonds for a total cost of $60,000. The face value of each bond is $1,000, so the total face value of all the bonds is $60,000. The bonds pay 8% interest annually, so each bond pays $80 in interest each year.
Since Bay Company held the bonds for the entire 5-year term, it received a total of $80 x 60 x 5 = $24,000 in interest payments over the life of the bonds.
When Bay Company sells the bonds for $64,500, it realizes a gain of $4,500 ($64,500 - $60,000). 
Therefore, the answer is D. Gain of $4,500.

Bay Company Acquires 60, 8%, 5 Year, $1,000 Community Bonds