Zork Corporation was very profitable and had accumulated excess cash.The company decided to repurchase some of its bonds that had been issued for $1,000,000.Because of an increase in market interest rates, Zork was able to retire the bonds for $900,000.The company is not required to recognize $100,000 of income from the discharge of its indebtedness but must reduce the basis in its assets.

Question

Quizplus · Accepted Answer

The company would recognize a gain from the extinguishment of debt of $100,000 because it retired the bonds for less than their face value. This gain is recognized in the income statement, not through a reduction in the basis of its assets.

Zork Corporation Was Very Profitable and Had Accumulated Excess Cash