Question

A corporation issued 8% bonds with a par value of $1,000,000, receiving a $20,000 premium. On the interest date 5 years later, after the bond interest was paid and after 40% of the premium had been amortized, the corporation purchased the entire issue on the open market at 99 and retired it. What is the gain or loss on this retirement ?

Answer 1

There is a gain worth $22,000.

Step-by-step explanation:

The corporation mentioned here issues 8% bonds with par value of $1,000,000.

The premium received is $20,000.

The bond interest is paid off after 5 years when 40% of the premium is amortized.

Amortized here means paid off through payments in small regular amounts.

The corporation purchased the whole issue at 99 in the open market.

The gain or loss here will be

=Face Value + Unamortized Premium - Purchase Price

=$1,000,000 + (60% x $20,000) - (99% x $1,000,000)

= $22,000

So, there is a gain of $22,000.