Question

Zork Corporation was very profitable and had accumulated excess cash. The company decided to repurchase some of its bonds that had been issued for $1,000,000. Because of an increase in market interest rates, Zork was able to retire the bonds for $900,000. The company is not required to recognize $100,000 of income from the discharge of its indebtedness but

A. True
B. False

Answer 1

The claim that Zork Corporation is not required to recognize $100,000 of income from the repurchase of its bonds for less than their issued amount is false. A gain is usually recognized when a company retires its debt for less than its carrying amount, according to accounting principles.

Step-by-step explanation:

Given that Zork Corporation was able to retire its bonds for less than the amount issued due to an increase in market interest rates, the statement about the company not being required to recognize the $100,000 income from the discharge of its indebtedness is false. When a company retires its debt for less than its carrying amount, the difference is generally recognized as a gain in the income statement. The amount by which the repurchase price is less than the carrying amount (the face value plus any unamortized premium or less any unamortized discount) of the debt is reported as a gain, which should be recognized in the income statement. This situation is an example of the accounting principle where a company must recognize gains and losses on the extinguishment of debt.