Final answer:
The computation of gain or loss on refunding bonds requires comparing the old bonds' carrying amount to the new bonds' reacquisition price. In this case, since both sets of bonds were issued at par, no gain or loss would be recognized on the exchange itself. Further information on market conditions or carrying amount would be needed to assess any potential gain or loss stemming from changes in interest rates.
Step-by-step explanation:
The question involves the computation of gain or loss on the refunding of bonds. The city issued refunding bonds with a coupon rate of 5% to replace outstanding bonds with a coupon rate of 6%. Both bonds have a face value of $3,000,000. When bonds are refunded, the gain or loss is typically calculated by comparing the net carrying amount of the old bonds with the reacquisition price of the new bonds.
However, since both bonds were issued at par (face value), the reacquisition price equals the face value, and there is no premium or discount involved in the transaction. Therefore, the outstanding bonds would have been refunded at their carrying amount with no gain or loss resulting from this direct exchange, as neither the cash flows nor the carrying values change.
As such, any potential gain or loss related to the refunding transaction would be tied to changes in future cash flows due to the difference in interest rates, not to the reacquisition price versus carrying value, which is not provided in this scenario. Without additional information about the carrying amount of the outstanding bonds or the market conditions affecting the refund, a precise calculation of gain or loss cannot be provided.