Because of changing market conditions,Friendly Corporation made the decision to redeem $300,000 of its bonds prior to maturity.The bonds had been issued at a discount and the balance in the discount account at the time of redemption was $15,000.The corporation's bond certificates indicated that the bonds could be retired early at 103.Friendly's retirement of the bonds would result in a(n)
A)loss of $24,000.
B)gain of $6,000.
C)decrease in owners' equity of $9,000.
D)increase in assets of $15,000.

Question

Quizplus · Accepted Answer

CThe redemption price of the bonds is 103% of the face value, which is $300,000 * 103% = $309,000. Since the bonds were issued at a discount, the book value of the bonds at the time of redemption is the face value minus the unamortized discount, which is $300,000 - $15,000 = $285,000. Therefore, retiring the bonds for $309,000 when their book value is $285,000 results in a loss of $24,000 (A). This loss decreases owners' equity (C), as losses reduce retained earnings, a component of owners' equity.

Because of Changing Market Conditions,Friendly Corporation Made the Decision to Redeem