On January 1, 2011, F Corp. issued 3,600 of its 8%, $1,000 bonds for $3,710,000.

Question

On January 1, 2011, F Corp. issued 3,600 of its 8%, $1,000 bonds for $3,710,000. These bonds were to mature on January 1, 2021, but were callable at 101 any time after December 31, 2014. Interest was payable semiannually on July 1 and January 1. On July 1, 2016, F called all of the bonds and retired them. The bond premium was amortized on a straight-line basis. Before income taxes, F Corp.'s gain or loss in 2016 on this early extinguishment of debt was:

On January 1, 2011, F Corp. issued 3,600 of its 8%, $1,000 bonds for $3,710,000. These bonds were to mature on January 1, 2021, but were callable at 101 any time after December 31, 2014. Interest was payable semiannually on July 1 and January 1. On July 1, 2016, F called all of the bonds and retired them. The bond premium was amortized on a straight-line basis. Before income taxes, F Corp.'s gain or loss in 2016 on this early extinguishment of debt was:

Explanation / Answer

Premium on bond = 3710000 - 3600x1000

= 110000

Annual amortization = 110000/10 = 11000

Balance in bonds paable account on 1 julu 2016 = 3710000 - 11000 x 5

= 3655000

Loss on bonds = 3655000 + 3600000x101%

= 19000

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