On January 1, 2008, F Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2018, but were callable at 101 any time after December 31, 2011. Interest was payable semiannually on July 1 and January 1. On July 1, 2013, F called all of the bonds and retired them. The bond premium was amortized on a straight-line basis. Before income taxes, F's gain or loss in 2013 on this early extinguishment of debt was:
A)$16,000 gain.
B)$20,000 loss.
C)$24,000 gain.
D)$60,000 gain.

Question

Quizplus · Accepted Answer

The bonds were issued at a premium of $80,000 ($2,080,000 - $2,000,000). The premium is amortized over 10 years, so the annual amortization is $8,000. By July 1, 2013, 5.5 years of amortization have occurred, totaling $44,000. The unamortized premium is $36,000 ($80,000 - $44,000). The call price is $2,020,000 (101% of $2,000,000). The carrying amount of the bonds is $2,036,000 ($2,000,000 + $36,000). The loss is $16,000 ($2,036,000 - $2,020,000).