Question

On January 1, 2010, Goll Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2020 but were callable at 101 any time after December 31, 2013. Interest was payable semiannually on July 1 and January 1. On July 1, 2015, Goll called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Goll's gain or loss in 2015 on this early extinguishment of debt was:

1) 20,000 loss
2) 16,000 gain
3) 60,000 gain
4) 24,000 gain

Answer 1

The correct option is 1. Goll Corp. experienced a $16,000 loss on the early extinguishment of its debt after calling the bonds at 101% of face value and taking into account the unamortized premium.

Step-by-step explanation:

The calculation of the gain or loss from the early extinguishment of debt requires comparing the amount at which the bonds were retired with the book value of the debt at the time of retirement. Goll Corp. issued bonds for $2,080,000 and later called them at 101, which means 101% of the face value of the bonds. As a result, Goll Corp. paid $2,020,000 to call the bonds ($1,000 bonds x 2,000 x 101%).

The bond premium was $80,000 ($2,080,000 - $2,000,000), and since the bonds were to mature in 10 years but were called after 5.5 years, the unamortized portion of the bond premium at the time of the call would be $44,000 ($80,000 x (4.5/10)). Therefore, the book value of the bonds when called would be $2,036,000 ($2,000,000 face value + $36,000 amortized premium).

To calculate the gain or loss, subtract the book value from the call price: $2,020,000 - $2,036,000 = -$16,000, which is a loss. Thus, Goll Corp. realized a $16,000 loss on the early extinguishment of the debt.