On January 1, 2012, Corporation A issued $18,000,000 of 10% ten-year bonds at 10

Question

On January 1, 2012, Corporation A issued $18,000,000 of 10% ten-year bonds at 103. The bonds are callable at the option of Corporation A at 105. Corporation A has recorded amortization of the bond premium on the straight line method.

On December 31, 2018, when the fair value of the bonds was 96, Corporation A repurchased $4,000,000 if the bonds in the open market at 96. Corporation A has recorded interest and amortization for 2018.

What amount of gain/loss(ignoring income tax) would Corporation A report on this acquisition of bonds?

I need help understanding how to solve a problem like this.

Explanation / Answer

Face Value of bonds          18,000,000 Issue price of bonds          18,540,000 Premium on bonds                540,000 Amortization per year                  54,000 (540000 /10) Amortization upto Dec 31, 2018                378,000 (54000 x 7) Carrying value of bonds on Dec 31, 2018          18,162,000 (18540000-378000) Proportional carrying value of bonds repurchased            4,036,000 (18162000 x 4/18) Less: repurchase price            3,840,000 (4000000 x 96%) Gain on repurchase                196,000

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