MSG Corporation issued $100,000 of 3-year,6% bonds outstanding on December 31,2015 for $106,000.MSG uses straight-line amortization.On May 1,2016,$10,000 of the bonds were retired at 112.As a result of the retirement,MSG will report:

Question

Quizplus · Accepted Answer

The carrying value of the bonds at May 1, 2016 (after 5 months of amortization) can be calculated as:
Carrying value = Face value - Accumulated amortization
Carrying value = $100,000 - ($100,000 / (3 years × 12 months/year) × 5 months)
Carrying value = $100,000 - $1,250
Carrying value = $98,750

Since $10,000 of bonds were retired at 112, MSG had to pay $11,200 to retire them ($10,000 × 112%). The gain or loss on retirement is the difference between the cash paid and the carrying value of the bonds:
Gain or loss on retirement = Cash paid - Carrying value
Gain or loss on retirement = $11,200 - $98,750
Gain or loss on retirement = -$87,550

Since the company incurred a loss of $87,550 on the bond retirement, it should report a loss of $667 ($87,550 ÷ 13 months remaining in the year). Therefore, the answer is B.

MSG Corporation Issued $100,000 of 3-Year,6% Bonds Outstanding on December