Salem Co. has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94.

-If Salem Co. retires $10 million of these bonds by purchasing them from bondholders at current market price, the company will report:

Question

Salem Co. has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94.

-If Salem Co. retires $10 million of these bonds by purchasing them from bondholders at current market price, the company will report:

Quizplus · Accepted Answer

Salem Co. will report a gain because they are buying back the bonds at a market price lower than the par value. The bonds are being repurchased at 94% of par, which is $9.4 million for $10 million of bonds. The difference between the par value ($10 million) and the repurchase price ($9.4 million) is $600,000, which is recognized as a gain.

Salem Co Has Outstanding $100 Million of 7% Bonds, Due in in 7