On January 1, 2014, Linen Corp.issued $450,000 (face value), 10%, ten-year bonds at 103. The bonds are callable at 105.Linen has recorded amortization of the bond premium by the straight-line method. On December 31, 2020, Linen repurchased $100,000 of the bonds in the open market at 96. Bond interest expense and premium amortization have been recorded for 2020.Ignoring income taxes, what is the loss or gain arising from this reacquisition?

Question

Quizplus · Accepted Answer

The bonds were issued at 103, meaning there was a premium of 3% on the $450,000, which is $13,500. This premium is amortized over 10 years, so the annual amortization is $1,350. By December 31, 2020, 7 years of amortization would have occurred, totaling $9,450. The unamortized premium is $13,500 - $9,450 = $4,050. The carrying amount of the $100,000 bonds is $100,000 + ($4,050 * ($100,000/$450,000)) = $100,900. The repurchase price is $96,000. The gain is $100,900 - $96,000 = $4,900.