Question

On July 1, 2019, immediately after recording interest payments, Salsa, Inc. retired one fifth of its $500,000 of bonds payable for $97,500. The bonds were originally issued at par value in 2014. Which of the following statements is correct?
Stockholders' equity is not affected by the bond retirement
A gain of $2, 500 will be reported on the income statement
A loss of $2, 500 will be reported on the income statement
A gain of $402, 500 will be reported on the income statement

Answer 1

Answer:

A gain of $2, 500 will be reported on the income statement.

Explanation:

When a bond is issued at par it means that there are no discounts or bond premium. Rather the bonds that are issued at par will be sold at face value.

This means that the bond's contract and market rates are equal.

Therefore in this scenario one fifth of the bond was sold at $97,500.

Value of the bond is $500,000, so the market value of portion of bond sold is:

(1/5)* 500,000= $100,000

However the amount payable is $97,500

Profit made= Market price - Amount payable

Profit made = 100,000 - 97,500= $2,500 gain