Question

On January 1, 2013, F Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2023, but were callable at 101 any time after December 31, 2016. Interest was payable semiannually on July 1 and January 1. On July 1, 2018, F called all of the bonds and retired them. The bond premium was amortized on a straight-line basis. Before income taxes, F Corp.'s gain or loss in 2018 on this early extinguishment of debt was:

Answer 1

Answer:

F Corp.'s gain or loss in 2018 on this early extinguishment of debt was $16,000

Explanation:

According to the given data we can note that the Bond premium at issue is $80,000

Hence, Amortization of premium through July 1, 2016= $80,000/20 = $4,000 per period$

So, 4,000 x 11 periods= $44,000

There is an Unamortized premium July 1, 2018 $36,000  and Face value of $2,000,000

The Book value July 1, 2018= $2,036,000

Therefore, the Call (redemption) price = $2,000,000 x 1.01= $2,020,000

Therefore, gain or loss in 2018= The Book value July 1, 2018- Call (redemption) price

Gain on extinguishment=$2,036,000 - $2,020,000 = $16,000