Final answer:
Foster Corporation would recognize a loss of $5,880 on the retirement of the bonds the gain or loss would be the difference between the carrying value and the retirement price. In this case, the retirement price is higher than the carrying value, resulting in a loss for Foster.
Step-by-step explanation:
In this question, we are given the information about Foster Corporation issuing a $100,000, 10-year, 10 percent bond for $112,000 on January 1, 2007. Foster uses the straight-line method of amortization. Then, on January 1, 2010, Foster reacquires the bonds for retirement when they were selling at $102 on the open market. To find the gain or loss Foster should recognize on the retirement of the bonds, we need to calculate the carrying value of the bond on January 1, 2010. The carrying value can be found by amortizing the premium or discount over the life of the bond. Since Foster uses the straight-line method, the annual amortization amount is determined as the premium/discount divided by the number of years until maturity. In this case, Foster received a premium of $12,000 ($112,000 - $100,000) and there are 3 years until maturity (2010, 2011, 2012).
Therefore, the annual amortization amount would be $4,000 ($12,000 / 3). To find the carrying value on January 1, 2010, we subtract the amortization amount from the face value of the bond. The face value is $100,000, so the carrying value on January 1, 2010, would be $96,000 ($100,000 - $4,000). Now, we can calculate the gain or loss on retirement. Since the bonds were reacquired for retirement at $102 on the open market, the gain or loss would be the difference between the carrying value and the retirement price. In this case, the retirement price is higher than the carrying value, resulting in a loss for Foster. The loss would be calculated as the retirement price ($102) minus the carrying value ($96,000), which equals -$5,880.