Question

On January 2, 20X1, Meister Co. called its $500,000, 8% bonds with a carrying value of $480,000. The call price is $502,000. The bonds originally were issued to yield 9%. On the call date, the company should recognize:

a) A gain of $2,000
b) A loss of $22,000
c) A gain of $22,000
d) A loss of $2,000

Answer 1

On the call date, Meister Co. should recognize a gain of $22,000.

Step-by-step explanation:

When a company calls its bonds, it must recognize a gain or loss on the early retirement of the debt. In this case, Meister Co. called its $500,000 8% bonds, which had a carrying value of $480,000. The call price was $502,000. To determine the gain or loss on the call date, we can compare the carrying value of the bonds with the call price.

The carrying value of the bonds was $480,000, and the call price was $502,000. Therefore, we can calculate the gain or loss as follows:

Gain or loss = Call price - Carrying value

Gain or loss = $502,000 - $480,000

Gain or loss = $22,000

So, the correct answer is option c) A gain of $22,000.