Question

On January 1, 2016, F Corp. issued 3,800 of its 10%, $1,000 bonds for $3,916,000. These...

On January 1, 2016, F Corp. issued 3,800 of its 10%, $1,000 bonds for $3,916,000. These bonds were to mature on January 1, 2026, but were callable at 101 any time after December 31, 2019. Interest was payable semiannually on July 1 and January 1. On July 1, 2021, 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 2021 on this early extinguishment of debt was:4

  • $14,200 gain.

  • $38,000 loss.

  • $25,800 gain.

  • $96,000 gain.

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Answer #1
Premium on issue 116000 =3916000-3800000
Semi-annual premium amortization 5800 =116000/20
Periods of premium amortized 11 January 1, 2016 to July 1, 2021
Unamortized premium periods 9
Unamortized premium 52200 =116000*9/20
Carrying value of bonds on July 1, 2021 3852200 =3800000+52200
Less: Amount paid for redemption 3838000 =3800000*1.01
Gain on early extinguishment 14200
Option A $14,200 gain is correct
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