Final answer:
The redemption of bonds payable at 101 results in a $3,000 loss, calculated as the redemption price of $1,010,000 minus the carrying amount of $1,007,000.
Step-by-step explanation:
The calculation provided accurately determines the gain or loss on the redemption of bonds. Let's break down the steps and reasoning for a comprehensive understanding.
Firstly, the Bonds Payable account indicates the face value of the bonds, which is $1,000,000 in this scenario. The Premium on Bonds Payable account represents the excess amount paid by investors over the face value to acquire the bonds. In this case, the premium is $7,000.
When the issuing corporation decides to redeem the bonds at 101%, it means they are repurchasing the bonds at a price higher than their face value. The redemption price is calculated by multiplying the face value by the redemption percentage: $1,000,000 * 101% = $1,010,000.
The carrying amount of the bonds is the sum of the face value and the premium. Therefore, it is $1,000,000 + $7,000 = $1,007,000.
The gain or loss on redemption is determined by subtracting the carrying amount from the redemption price. In this case, it is $1,010,000 - $1,007,000 = $3,000 loss.
This loss arises because the corporation is repurchasing the bonds at a premium, meaning they are paying more than the carrying amount. Losses on bond redemptions occur when the redemption price exceeds the carrying amount.
In conclusion, the calculated $3,000 loss accurately represents the financial impact of redeeming the bonds at 101% of the face value, considering both the face value and the premium on the Bonds Payable.