Question

On the day Trott Ltd redeemed its $1,000,000 face value bonds at 98, their carrying value was $1,200,000.

Required:

Prepare a residual analysis (include figures) for the bond redemption. If you recognise a gain or loss, state where in the Statement of Comprehensive Income the gain or loss should appear.

Answer 1

Since bond face value is $1,000,000 and it is redeemed at 98%, so following gain will be recorded:
	bonds payable	$        1,000,000		Face Value of bonds
	Premium on bonds payable	$            200,000		Unamortized premium
	Gain on redemption of bonds		$ 220,000	Gain on redemption
	Cash		$ 980,000	($1,000,000 x 98%)
As per FASB statement no 4 This gain on redemption should appear under the head other income and expenses, since this is
not a operating income and if the amount is large enough, it should appear in extraordinary
gain or losses.