Question

59) A corporation issued 8% bonds with a par value of $1,140,000, receiving a $48,000 premium. On the interest date 5 years later, after the bond interest was paid and after 40% of the premium had been amortized, the corporation purchased the entire issue on the open market at 99 and retired it. The gain or loss on this retirement is:

A) $0.                                                                          B) $40,200 gain.

C) $40,200 loss.                                                          D) $11,400 loss.

E) $11,400 gain.

Answer 1

• All working forms part of the answer
• Workings

A	Bond's face Value	$          1,140,000
B	Premium on Issue	$                48,000
C = B x 40%	Premium amortised till retirement	$                19,200
D = B - C	Unamortised Premium	$                28,800
E = A + D	Carrying Value at the time of retirement	$          1,168,800
F = A x 99%	Retired at	$          1,128,600
G = E - F	Gain on Retirement	$                40,200 = Answer

• Since the Cash paid on retirement is LESS than the carrying value of the Bond, there’s a Gain of $ 40,200
• Correct Answer = Option ‘B’ $ 40,200 Gain