Question

A bond with a $750,000 maturity value is immediately retired for $745,000 plus accrued interest. The discount on bonds payable (bond discount) at the retirement date is $25,500. Which of the following statements is correct?a. the gain on the debt extinguishment is $ 5,000

b. the loss on the debt extinguishment is $ 20,500
c. the gain on the debt extinguishment is $ 30,500
d. the gain or loss on the debt extinguishment can't be determined without knowing the dollar amount of the accrued interest.

Answer 1

B.The loss on the debt extinguishment is $20,500.

Step-by-step explanation:

Maturity value $745,000

Less Accrued interest $750,000

Difference $-5,000

Hence,

Discount on bonds payable $5,000 - $25,500 = - 20,500.

The loss ($20,500) is the difference between the book value ($724,500) and the amount paid ($745,000) to retire the bonds which is a loss results because the payment is far greater than the actual book value.