Bonds Payable has a balance of $1,000,000 and Premium on Bonds Payable has a balance of $7,000. If the issuing corporation redeems the bonds at 101, what is the amount of gain or loss on redemption?
A) $3,000 loss
B) $3,000 gain
C) $7,000 loss
D) $7,000 gain

Question

Quizplus · Accepted Answer

When bonds are redeemed at a price higher than their face value, it results in a loss for the issuing corporation. In this case, the bonds payable have a face value of $1,000,000 but are being redeemed at 101, which means they are being redeemed at $1,010,000 ($1,000,000 x 101%).

The premium on bonds payable of $7,000 indicates that the bonds were issued at a premium, which means the corporation received more cash than the face value of the bonds.

To calculate the gain or loss on redemption, we need to compare the amount paid to redeem the bonds ($1,010,000) to the carrying value of the bonds on the balance sheet, which includes both the face value and any unamortized premium or discount.

The carrying value of the bonds would be:
$1,000,000 (face value) + $7,000 (unamortized premium) = $1,007,000

So the loss on redemption would be:
$1,010,000 (amount paid) - $1,007,000 (carrying value) = $3,000 loss

Bonds Payable Has a Balance of $1,000,000 and Premium on Bonds