The bond's retirement will result in a gain of $2,800 if the $100,000 face value of the bond is retired at 96.
The company will pay out cash equal to 96% of the bond's $100,000 face value if it is retired at age 96, thus,
= face value x pay out cash
= $100,000 x 96%
= $100,000 x 96/100
= $1000 x 96
= $96,000.
Face value of the bonds = $100,000
Discount on bonds payable = $1,200
The bonds' book value equals their face value of $100,000 less the $1,200 discount. So,
Book value of the bonds = Bond with face value - Discount
= $100,000 - $1,200
= $98,800
Since the bonds were retired at less than their book value, the gain on the retirement is as follows:
The gain on the retirement = Book value of the bonds - Face value of retired at 96
= $98,800 - $96,000
= $2,800
As a result, there is a gain of $2,800 gain from retiring the bond.
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