The December 31, 2017, statement of financial position of Cotton Corporation includes the following:
9% bonds payable due December 31, 2023 $718,900
The bonds have a face value of $700,000, and were issued on December 31, 2016, at 103, with interest payable on July 1 and December 31 of each year.Cotton uses straight-line amortization to amortize bond premium or discount.On March 1, 2018, Cotton retired $280,000 of these bonds at 98 plus accrued interest.Ignoring income taxes, what should Cotton record as a gain on retirement of these bonds?

Question

Quizplus · Accepted Answer

Step 1: Calculate the carrying value of the bonds on March 1, 2018
Carrying value on March 1, 2018 = Face value of bonds - Amortization of premium - Portion of premium related to bonds retired + Accrued interest
Carrying value on March 1, 2018 = $700,000 - (($718,900 - $700,000) / 7 years) * (1.167 years) - (($280,000 / $700,000) * ($18,900)) + ($18,900 / 2)
Carrying value on March 1, 2018 = $419,974

Step 2: Calculate the gain or loss on retirement of bonds
Cash paid for retirement = $280,000 * 0.98 + $18,900 = $277,020
Gain on retirement = Carrying value of bonds - Cash paid for retirement
Gain on retirement = $419,974 - $277,020 = $142,954

Step 3: Allocate the gain between the amortization of premium and the retirement of bonds
Amortization of premium from December 31, 2017, to March 1, 2018 = (($718,900 - $700,000) / 7 years) * (2/12) = $2,873
Gain related to amortization of premium = $2,873 / $142,954 * $280,000 = $5,626

Therefore, the gain on retirement of these bonds should be recorded as $13,020 ($142,954 - $5,626). Option B is the correct answer.

The December 31, 2017, Statement of Financial Position of Cotton