Question

On February 1, 2020, Pat Weaver Inc. (PWI) issued 10%, $1,000,000 bonds for $1,116,000. PWI retired all of these bonds on January 1, 2021, at 102. Unamortized bond premium on that date was $92,800. How much gain or loss should be recognized on this bond retirement

Answer 1

72,800 gain should be recognised on this bond retirement

Solution:

Bond redemption applies to repurchases of newly sold debt by creditors. If the bonds have been issued, the borrower excludes the debt due in its accounts at the expected maturity of those instruments.

Paid at redemption : $1,000,000 * 102          = 1,020,000    

Book value: $1,000,000 + $92,800               = 1,092,800

                                                                      ----------------------

Gain on bond retirement                                 = 72,800

Answer 2

An unamortized bond premium is a difference in the total amount that the issuer of the bond sells securities below the real face value of the bond at maturity.

What is the effect of amortizing the bond premium?

If a bond is issued at a price greater than its face value, the difference is called Bond Premium.

The issuer must pay the bond within the entire life of the Bond, which, in turn, reduces the amount charged to interest costs.  

Pat Weaver Inc. Redemption amount : 1,020,000

(10,000 * 102)

Face value (1,000,000+92800)              1,092,800

gain on retirement of bond         =           72,800

Hence, the gain or loss on the retirement of the bond is 72,800.

To learn more about bond premium, refer:

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