Alright, bonds is killing me! especially questions like this.
On February 1, Year 1, Davis Corp. issued 12%, $1,000,000 face amount, 10-year bonds for $1,117,000. Davis reacquired all of these bonds at 102, plus accrued interest, on May 1, Year 4 and retired them. This type of transaction is considered a normal part of risk management for Davis Corp. Unamortized bond premium on that date was $78,000. What was Davis' gain on the bond retirement?
a. 39000
b. 58000
c. 97000
d. 19000
Explanation
Choice “b” is correct. $58,000 gain on bond retirement.
Bonds at face value $ 1,000,000
Add: Unamortized bond premium 78,000
Carrying value of bonds to be retired 1,078,000
Less: Cash paid (1,000 bonds at 102) (1,020,000)
Gain on bond retirement $ 58,000
Debit (Dr) Credit (Cr)
Bonds payable $ 1,000
Unamortized bond premium 78
Cash $ 1,020
Gain 58
My question is why did we add the unamortized premium of 78000? I get confused on when to add or subtract that? I thought you only add if it's a unamortized discount? Also, we add 78000 to get to the carrying value of bonds of 1078000 but why don't we use the 1117000, the value of the issued bonds? Lost!
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