Final answer:
The gain on retirement of Chang Industries bonds is calculated by subtracting the call price of $226,000 from the carrying value of $233,000, resulting in a gain of $7,000.
Step-by-step explanation:
The question involves calculating the gain or loss on retirement of bonds for Chang Industries. The bonds have a par value of $220,000 and a carrying value of $233,000. If the company calls the bonds at a price of $226,000, we need to compare the call price to the carrying value to determine the gain or loss.
To calculate the gain or loss, the formula is: Carrying Value - Call Price. Thus, $233,000 - $226,000 equals a gain of $7,000. This is because the bonds are retired for less than their carrying value.
Another example of calculating the present value of future bond payments is shown with a simple two-year bond example. When the discount rate is the same as the bond's interest rate, present value calculations result to the bond's face value.
Changes in the discount rate, such as an increase to 11%, lead to changes in the present value of the bond, typically making it less than its face value due to the higher discount applied to future payments. As interest rates rise, one would expect to pay less than the face value for the bond.