A corporation issued 8% bonds with a par value of $1,000,000, receiving a $20,000 premium. On the interest date 5 years later, after the bond interest was paid and after 40% of the premium had been amortized, the corporation purchased the entire issue on the open market at 99 and retired it. The gain or loss on this retirement is:
A) $10,000 loss.
B) $22,000 gain.
C) $0.
D) $10,000 gain.
E) $22,000 loss.

Question

Quizplus · Accepted Answer

The bond was issued with a premium of $20,000 and 40% of it has been amortized, which means the amortized amount is $8,000 ($20,000 x 40%). Therefore, the book value of the bond is $1,008,000 ($1,000,000 + $20,000 - $8,000).

When the corporation purchases the entire issue on the open market at 99, they pay $990,000 ($1,000,000 x 0.99). Since the book value of the bond is $1,008,000, the corporation recognizes a gain of $18,000 ($1,008,000 - $990,000).

Therefore, the correct answer is (B) $22,000 gain. (Note: The question stated the gain or loss, so the answer should be a positive or negative number, not just the word "gain" or "loss.")

A Corporation Issued 8% Bonds with a Par Value of $1,000,000