On July 1, 2017, immediately after recording interest payments, Salsa, Inc. retired one fifth of its $500,000 of bonds payable for $97,500. The bonds were originally issued at par value in 2012. Which of the following statements is correct?
A)Stockholders' equity is not affected by the bond retirement.
B)A gain of $2,500 will be reported on the income statement.
C)A loss of $2,500 will be reported on the income statement.
D)A gain of $402,500 will be reported on the income statement.

Question

Quizplus · Accepted Answer

When a bond is retired before its maturity date, the company may incur a gain or loss on the retirement. In this case, the bonds have a carrying value of $100,000 (original cost of $500,000 divided by 5), but Salsa, Inc. retired the bonds for $97,500, which means the company received $2,500 less than the carrying value. Therefore, a gain of $2,500 will be reported on the income statement. Stockholders' equity will be affected because the bonds are a liability, and retiring them reduces the liability, which increases the stockholders' equity.

On July 1, 2017, Immediately After Recording Interest Payments, Salsa