ExpertMedium1 markMultiple Choice
CPA · Question 14 · Area II: Balance Sheet Accounts
A company has a $100,000 bond payable outstanding with unamortized premium of $5,000. It retires the bond by paying $102,000. What is the gain or loss on extinguishment?
A company has a $100,000 bond payable outstanding with unamortized premium of $5,000. It retires the bond by paying $102,000. What is the gain or loss on extinguishment?
Answer options:
A.
$3,000 Gain
B.
$3,000 Loss
C.
$2,000 Loss
D.
$7,000 Gain
How to approach this question
Compare Net Carrying Value to the Reacquisition Price. If Carrying Value > Price Paid, it's a Gain.
Full Answer
A.$3,000 Gain✓ Correct
Net Carrying Value = $100,000 + $5,000 = $105,000.<br/>Cash Paid = $102,000.<br/>Gain = $105,000 - $102,000 = $3,000.<br/>(We cleared a $105k debt for only $102k).
Common mistakes
Ignoring the premium; confusing gain/loss direction.
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