Question

Ervay Company has $3,500,000 of bonds outstanding. The unamortized premium is $50,400. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption?

a. $15,400 gain
b. $15,400 loss
c. $35,000 gain
d. $35,000 loss

Answer 1

To calculate the gain or loss on the redemption of bonds, we must subtract the carrying amount from the redemption price. Ervay Company's carrying amount of the bonds is $3,550,400 and the redemption price at 101% is $3,535,000, resulting in a $15,400 loss.

Step-by-step explanation:

To calculate the gain or loss on redemption of Ervay Company's bonds, one must first determine the bonds' carrying amount. The carrying amount is the bonds outstanding ($3,500,000) plus the unamortized premium ($50,400), which equals $3,550,400. When the company redeems the bonds at 101%, they are paying 101% of the bonds' face value, which is $3,500,000 x 101% = $3,535,000. Subtracting the carrying amount from the redemption price, $3,535,000 - $3,550,400, results in a loss of $15,400. Therefore, the correct answer would be (b) a $15,400 loss.