Nickel Inc. bought $100,000 of 3-year, 6% bonds as an investment on December 31, 2012 for $106,000. Nickel uses straight-line amortization. On May 1, 2013, $10,000 of the bonds were redeemed at 110. How much, and what type of gain or loss, most likely results from this redemption?

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The bonds were purchased at a premium, so the premium is amortized over the life of the bonds. The premium is $6,000 over 3 years, which is $2,000 per year or approximately $167 per month. By May 1, 2013, 4 months of amortization have occurred, reducing the premium by $667. The carrying amount of the $10,000 redeemed is $10,667 ($10,000 face value + $667 unamortized premium). The redemption price is $11,000 (110% of $10,000), resulting in a gain of $333 ($11,000 - $10,667).