On January 1, 2020, Halibut Corp. issued $ 1,000,000, 10% bonds for $ 1,040,000. These bonds were to mature on January 1, 2030 but were callable at 101 any time after December 31, 2020. Interest was payable semi-annually on July 1 and January 1. On July 1, 2025, Halibut called all the bonds and retired them. Bond premium was amortized on a straight-line basis. Ignoring income taxes, Halibut's gain or loss in 2025 on this early extinguishment of debt was

Question

Quizplus · Accepted Answer

The correct answer is B. The gain on early extinguishment of debt is calculated as the difference between the carrying value of the bonds and the call price. The carrying value of the bonds is $1,020,000 ($1,040,000 - $20,000 (bond premium amortized over 10 years)). The call price is $1,010,000 ($1,000,000 x 101%). Therefore, the gain on early extinguishment of debt is $10,000 ($1,020,000 - $1,010,000).