Question

Bonds Payable has a balance of $3,500,000 and Discount on Bonds Payable has a balance of $100,000. If the issuing corporation redeems the bonds at 98.5, what is the amount of gain or loss on redemption?

Answer 1

In order to determine the gain/loss of the redemption of the bond, we compare the carrying value of the bond with the Redemption value of the bond.

Step 1:- Calculate the Redemption value

Redemption Value =$3,500,000 * 98.5%

Redemption Value = $3,447,500

Step 2:- Calculate the carrying value of the bond

=Face value of the bond - Discount

=$3,500,000 - $100,000

Carrying value of the bond=$3,400,000

SInce the Redemption value of the bond is greater than the carrying value of the bond, the company has paid more amount to redeem the bonds than what the bond is actually worth. Hence, there is a loss on redemption.

Loss on Redemption = $3,447,500 - $3,400,000

Loss on Redemption = $47,500

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