Question

On February 1, 2020, Pat Weaver Inc. (PWI) issued 9%, $1,200,000 bonds for $1,500,000. PWI retired all of these bonds on January 1, 2021, at 105. Unamortized bond premium on that date was $126,000. How much gain or loss should be recognized on this bond retirement

Answer 1

Answer: Gain on bond retirement = $66,000

Step-by-step explanation:

A gain on retirement of bonds occurs when a bond issuer or a corporation buys back bonds which it previously sold for an amount less than the book value of the particular liability while a loss would be recognized if the bought back bonds are more than the amount of the book value of the liability.

Book value / Carrying value = $1,200,000 + $126,000 =$1,326,000

paid at redemption = $1,200,000 x 105%= $1, 260,000

Gain on bond retirement = Book/ Carrying value -Amount paid at redemption

= $1,326,000 - $1, 260,000 = $66,000