On October 15, 2013, Rural Sales has a bond with balances as shown below. If Rural Sales wishes to retire the bonds for $82,000, what will be the effect on the income statement?

Question

On October 15, 2013, Rural Sales has a bond with balances as shown below.  If Rural Sales wishes to retire the bonds for $82,000, what will be the effect on the income statement?

Quizplus · Accepted Answer

To find the gain or loss on retirement of bonds, we need to compare the carrying value of the bonds (the book value of the bonds on the balance sheet) with the cash paid to retire them. The carrying value of the bonds is calculated as follows:

Bonds payable: $80,000 
Add: Unamortized premium: $2,600 
Carrying value: $82,600

Since Rural Sales is retiring the bonds for $82,000, there will be a gain on retirement of $600 ($82,600 - $82,000 = $600). Therefore, the answer is A) Gain on retirement of $2,600.

On October 15, 2013, Rural Sales Has a Bond with Balances