On June 30, 2016, K Co. had outstanding 9%, $10,000,000 face value bonds maturin

Question

On June 30, 2016, K Co. had outstanding 9%, $10,000,000 face value bonds maturing on June 30, 2021. Interest is payable semiannually every June 30 and December 31. On June 30, 2016, after amortization was recorded for the period, the unamortized bond premium and bond issue costs were $60,000 and $100,000, respectively. On that date, K acquired all its outstanding bonds on the open market at 98 and retired them. At June 30, 2016, what amount should K Co. recognize as gain on redemption of bonds before income taxes?

Please show steps and calculations. Thanks.

Explanation / Answer

Book value of bonds at June 30, 2016, is $10,060,000 ($10,000,000 + $60,000).

Subtract redemption price: 98% × $10,000,000 = $9,800,000.

Gain = $260,000.

The remaining bond issue cost is written off as a loss and netted with the gain or loss on redemption. Gain = $260,000 - 100,000 = $160,000.

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