Question

On June 30, 2014, Prouty Co. had outstanding 9%, $5,000,000 face amount, 10-year bonds that pay interest semi-annually on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2014 were $200,000 and $50,000, respectively. On June 30, 2014, Prouty acquired all of these bonds at 101 and retired them. What amount of gain or loss would Prouty record on this early extinguishment of debt?

A. $505,000 gain.
B. $300,000 loss.
C. $200,000 gain.
D. $250,000 loss.

Answer 1

To calculate the gain or loss on early extinguishment of debt, subtract the carrying amount of the bonds from the cash paid to retire them. The correct answer is $300,000 loss.

Step-by-step explanation:

To calculate the gain or loss on early extinguishment of debt, we need to determine the carrying amount of the bonds and compare it to the cash paid to retire them. The carrying amount consists of the face amount of the bonds plus any unamortized bond discount or deferred bond issue costs. In this case, the carrying amount is calculated as $5,000,000 (face amount) - $200,000 (bond discount) - $50,000 (deferred bond issue costs) = $4,750,000. Prouty acquired the bonds at 101, meaning they paid 101% of the face amount, which is $5,050,000 (101% * $5,000,000).

The gain or loss is then calculated as the difference between the cash paid and the carrying amount: $5,050,000 - $4,750,000 = $300,000. Therefore, the correct answer is option B. $300,000 loss.