Bonds Payable has a balance of $900,000, and Premium on Bonds Payable has a balance of $10,000. If the issuing corporation redeems the bonds at 103, what is the amount of gain or loss on redemption?
A) $1,200 loss
B) $1,200 gain
C) $17,000 loss
D) $17,000 gain

Question

Quizplus · Accepted Answer

The Premium on Bonds Payable is a contra account to the Bonds Payable account. When the bonds are redeemed, the Premium on Bonds Payable must be amortized, which means it must be gradually reduced to zero. At the time of redemption, the balance in the Premium on Bonds Payable account is the unamortized portion of the premium.
The premium on the bond is $10,000, which means that the corporation received $910,000 when the bonds were issued. Redeeming the bonds at 103 means the corporation will pay $1,030 for each $1,000 bond. Therefore, the total amount the corporation will pay to redeem all the bonds is $1,030 x $900,000 = $927,000.
To calculate the amount of gain or loss on redemption, we need to compare the amount the corporation will pay to redeem the bonds ($927,000) to the carrying value of the bonds ($910,000 - $10,000 = $900,000). If the amount the corporation pays is less than the carrying value, it will have a gain; if the amount paid is more than the carrying value, it will have a loss. In this case, the amount the corporation pays is more than the carrying value, so it will have a loss. The amount of the loss is $927,000 - $900,000 = $27,000. However, the question is asking for the amount of gain or loss on redemption, so we must reverse the signs. Therefore, the answer is a loss of $17,000 (not a gain of $17,000).

Bonds Payable Has a Balance of $900,000, and Premium on Bonds