On January 1, 2004, F Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2014, but were callable at 101 any time after December 31, 2007. Interest was payable semiannually on July 1 and January 1. On July 1, 2009, F called all of the bonds and retired them. The bond premium was amortized on a straight-line basis. Before income taxes, F's gain or loss in 2009 on this early extinguishment of debt was:
A)$16,000 gain.
B)$20,000 loss.
C)$24,000 gain.
D)$60,000 gain.

Question

Quizplus · Accepted Answer

The bonds were issued at a premium of $80,000 ($2,080,000 - $2,000,000). The premium is amortized over 10 years, so $8,000 is amortized each year. By July 1, 2009, 5.5 years have passed, so $44,000 of the premium is amortized, leaving $36,000 unamortized. The call price is 101% of $2,000,000, which is $2,020,000. The carrying amount of the bonds is $2,036,000 ($2,000,000 + $36,000). The gain is $2,036,000 - $2,020,000 = $16,000.