Question

Michael company issued 8% bonds with a par value of 1,000,000 receiving 20,000 premium on the interest date 5 years later, after the bond interest was paid and after 40% of the premium had been amortized, the corporation purchased the entire issue on the open market at 99 and retired it. The gain or loss on this retirement is:
a. $10,000 gain.
b. $22,000 loss.
c. $10,000 loss.
d. $22,000 gain.
e. $0 .

Answer 1

Answer:

option D - $22,000 gain

Explanation:

the gain can be calculated by using the following relation

Face Value + Unamortized Premium - Purchase Price = gain

where,

Face Value - $1,000,000

 Unamortized Premium - 60% x $20,000

Purchase Price - 99% x $1,000,000

putting all value to get gain or loss on the retirement

= $1,000,000 + (60% x $20,000) - (99% x $1,000,000)

=  $22,000 gain