On its December 31, 2020 statement of financial position, Mackeral Ltd. reported bonds payable of $ 500,000. The bonds had been issued at par. On January 2, 2021, Mackeral retired one half of the outstanding bonds at 101 plus a call premium of $ 20,000. Ignoring income taxes, what amount should Mackeral report on its 2021 income statement as loss on extinguishment of debt?
A) $ 22,500
B) $ 20,000
C) $ 2,500
D) $ 0

Question

Quizplus · Accepted Answer

The loss on extinguishment of debt is calculated as the difference between the reacquisition price and the net carrying amount of the debt. Mackeral retired half of its $500,000 bonds, which is $250,000. The bonds were retired at 101, meaning 101% of the par value, so 101% of $250,000 is $252,500. Adding the call premium of $20,000 gives a total reacquisition price of $272,500. The net carrying amount of the debt being retired is $250,000. Therefore, the loss on extinguishment of debt is $272,500 - $250,000 = $22,500.

On Its December 31, 2020 Statement of Financial Position, Mackeral