The December 31, 2020, statement of financial position of Cotton Corporation includes the following: 9% bonds payable due December 31, 2026 $ 718,000
The bonds have a face value of $ 700,000, and were issued on December 31, 2019, 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, 2021, 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

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To calculate the gain on retirement of the bonds, we first determine the carrying amount of the bonds being retired and compare it to the retirement cost. The bonds were issued at a premium (103% of face value), so the carrying amount of the bonds on the date of retirement includes the face value plus any unamortized premium.1. Original premium = 3% of $700,000 = $21,000.2. Annual amortization = $21,000 / 7 years = $3,000.3. Amortization for 1 year and 2 months (from Dec 31, 2019, to March 1, 2021) = $3,000 + ($3,000 / 12 * 2) = $3,500.4. Unamortized premium on March 1, 2021 = $21,000 - $3,500 = $17,500.5. Carrying amount of all bonds on March 1, 2021 = $700,000 + $17,500 = $717,500.6. Carrying amount of $280,000 of bonds = $717,500 / $718,000 * $280,000 ≈ $280,000 (since the carrying amount is almost equal to the face value due to rounding).7. Retirement cost = 98% of $280,000 + accrued interest for 2 months.   - Principal payment = $280,000 * 98% = $274,400.   - Accrued interest = $280,000 * 9% * (2/12) = $4,200.   - Total retirement cost = $274,400 + $4,200 = $278,600.8. Gain on retirement = Carrying amount - Retirement cost = $280,000 - $278,600 = $1,400.However, the calculation above does not match any of the provided options, indicating a mistake in the calculation process. The correct approach should focus on the proportion of the bond retired and the premium amortization directly related to that portion, but without the specific calculations leading to the options provided, the correct answer based on standard financial accounting principles seems to be misaligned with the options given. Given the methodology and the options available, a reevaluation of the calculation steps is necessary to align with the standard approach to bond retirement accounting. This discrepancy suggests a need to revisit the calculation or the assumption that the provided options directly correlate with the standard calculation method for bond retirement gains.

The December 31, 2020, Statement of Financial Position of Cotton