Question

On January 1, 2011, Fox Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. These bonds were to mature on January 1, 2021, but were callable at 101 any time after December 31, 2013. Interest was payable semiannually on July 1 and January 1. On July 1, 2016, Fox called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Fox's gain or loss in 2016 on this early extinguishment of debt was

Answer 1

$8,000 gain

Step-by-step explanation:

the carrying value of the bonds at the time of the redemption:

10 coupon payments were made, so amortization of bond premium = ($40,000 / 20) x 11 = $22,000

carrying value = $1,040,000 - $22,000 = $1,018,000

redemption price = $1,000,000 x 1.01 = $1,010,000

Fox's gain = carrying value - redemption price = $1,018,000 - $1,010,000 = $8,000

Since the carrying value was higher than the redemption value, Fox must report a gain.