Question

bonds payable has a balance of $1,000,000 and discount on bonds payable has a balance of $10,000. if the issuing corporation redeems the bonds at 97.5, what is the amount of gain or loss on redemption?

Answer 1

The corporation will incur a loss on redemption of $15,000. This is calculated by subtracting the redemption price of $975,000 from the carrying amount of the bonds, which is $990,000 after accounting for the $10,000 discount on bonds payable.

Step-by-step explanation:

The question involves calculating the gain or loss upon the redemption of bonds. The bonds have a face value of $1,000,000 and are redeemed at 97.5% of their face value, which means for $975,000.

Given that there is a discount on bonds payable recorded at $10,000, the carrying amount of the bonds when redeemed would be $990,000 ($1,000,000 face value minus $10,000 discount).

To determine the gain or loss on redemption, you subtract the redemption price from the carrying amount of the bond:

Carrying amount of the bond = Face value - Discount = $1,000,000 - $10,000 = $990,000

Redemption price = 97.5% of face value = 0.975 * $1,000,000 = $975,000

Loss on redemption = Carrying amount - Redemption price = $990,000 - $975,000 = $15,000

Therefore, there is a loss on redemption of $15,000.