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.
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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