Question

Zork Corporation was very profitable and had accumulated excess cash. The company decided to repurchase some of its bonds that had been issued for $1,000,000. Because of an increase in market interest rates, Zork was able to retire the bonds for $900,000. The company is not required to recognize $100,000 of income from the discharge of its indebtedness but must reduce the basis in its assets.

A) True
B) False

Answer 1

The statement is True. When a company repurchases its bonds at a lower price than the face value, it recognizes a gain, which is not taxable but reduces the basis in its assets.

Step-by-step explanation:

The statement is True.

When a company repurchases its bonds at a lower price than the face value, it recognizes a gain from the difference between the repurchase price and the carrying value of the bonds. In this case, Zork Corporation retired the bonds for $900,000, resulting in a gain of $100,000. However, this gain is not recognized for tax purposes, meaning Zork Corporation does not have to include it as taxable income. Instead, the basis in its assets will be reduced by the amount of the gain.