Question

Chang Industries has bonds outstanding with a par value of $200,000 and a carrying value of $203,000. If the company calls these bonds at a price of $201,000, the gain or loss on retirement is:

a.$1,000 gain
b.$2,000 loss
c.$3,000 gain
d.$1,000 loss
e.$2,000 gain

Answer 1

Answer:

The correct option is E ,a gain of $2000

Explanation:

A carrying value of $203000 implies that Chang industries currently has obligation of paying bondholders $203000 sitting in the bond payable account.

From the above, to settle the obligation a cash outflow of $203,000,hence paying only $201000 means the company pays $2000 less than it ought to pay,then a gain of $2000 is recorded.

The double entries for this transaction is given below

Dr Notes payable account    $203000

Cr cash account                                      $201000

Cr gain on redemption                            $2000

The gain is written to profit or loss in the period of redemption as it is a realized gain.