On June 30,2014,Island Inc.had outstanding 10 percent,$1,000,000 face amount,15-year bonds maturing on June 30,2019.Interest is paid on June 30 and December 31,and bond discount and bond issue costs are amortized on these dates.The unamortized balances on June 30,2014,of bond discount and bond issue costs were $55,000 and $20,000,respectively.Island reacquired all of these bonds at 96 on June 30,2014,and retired them.Ignoring income taxes,how much gain or loss should Island record on the bond retirement?

Question

Quizplus · Accepted Answer

To determine the gain or loss on bond retirement, we need to calculate the carrying value of the bonds on June 30, 2014, which is the sum of the face amount and the unamortized bond discount and issue costs:

Carrying value = Face amount - Unamortized bond discount + Unamortized bond issue costs
Carrying value = $1,000,000 - $55,000 + $20,000
Carrying value = $965,000

Island reacquired all of the bonds at 96, which means they paid 96% of the face amount, or $960,000. Therefore, the gain or loss on bond retirement is:

Gain or loss = Reacquisition price - Carrying value
Gain or loss = $960,000 - $965,000
Gain or loss = -$5,000 (loss)

So the correct answer is B, a loss of $35,000.