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Salem Co.has outstanding $100 million of 7% bonds,due in 7 years,and callable at 104.The bonds were issued at par and are selling today at a market price of 94.
-If Salem Co.retires $10 million of these bonds by purchasing them from bondholders at current market price,the company will report:
A)A $600,000 gain.
B)A $500,000 loss.
C)A $700,000 gain.
D)Neither gains nor losses are recognized on early retirements of debt.

Question

Quizplus · Accepted Answer

The company will report a $600,000 gain because it retires the bonds at a market price of 94 (or $9.4 million for $10 million of bonds) while the bonds were issued at par ($10 million). The difference ($10 million - $9.4 million = $0.6 million) is the gain.

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