On July 1,2014,Miniature Company has bonds with balances as shown below. If the company retires the bonds for $66,150,what will be the effect on the income statement?

Question

On July 1,2014,Miniature Company has bonds with balances as shown below.  If the company retires the bonds for $66,150,what will be the effect on the income statement?

Quizplus · Accepted Answer

To determine the effect on the income statement, we need to compare the carrying value of the bonds (i.e. their book value on the company's books) with the amount paid to retire them.

Carrying value of bonds = $68,250 
Amount paid to retire bonds = $66,150

Since the amount paid to retire the bonds is less than their carrying value (i.e. a discount is realized on retirement), the company will report a gain on retirement. 
The amount of gain can be calculated as follows:
Gain on retirement = Carrying value of bonds - Amount paid to retire bonds 
= $68,250 - $66,150 
= $2,100

Therefore, the best choice is C - gain on retirement of $2,100.

On July 1,2014,Miniature Company Has Bonds with Balances as Shown