Ervay Company has $875,000 of bonds outstanding. The unamortized premium is $12,600. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption?
A) $3,850 gain
B) $3,850 loss
C) $8,750 gain
D) $8,750 loss

Question

Quizplus · Accepted Answer

The gain on the redemption is calculated as the difference between the redemption price and the carrying value of the bonds. The carrying value of the bonds is the face value of the bonds plus the unamortized premium, which is $875,000 + $12,600 = $887,600. The redemption price is 101% of the face value, which is $875,000 x 1.01 = $883,750. Therefore, the gain on the redemption is $883,750 - $887,600 = $3,850.

Ervay Company Has $875,000 of Bonds Outstanding