A bond with a $750,000 maturity value is immediately retired for $745,000 plus accrued interest. The discount on bonds payable (bond discount) at the retirement date is $25,500. Which of the following statements is correct? a. the gain on the debt extinguishment is $ 5,000

b. the loss on the debt extinguishment is $ 20,500

c. the gain on the debt extinguishment is $ 30,500

d. the gain or loss on the debt extinguishment can't be determined without knowing the dollar amount of the accrued interest.

Question

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Cade Hansen

24 November, 14:51

A bond with a $750,000 maturity value is immediately retired for $745,000 plus accrued interest. The discount on bonds payable (bond discount) at the retirement date is $25,500. Which of the following statements is correct? a. the gain on the debt extinguishment is $ 5,000

b. the loss on the debt extinguishment is $ 20,500

c. the gain on the debt extinguishment is $ 30,500

d. the gain or loss on the debt extinguishment can't be determined without knowing the dollar amount of the accrued interest.

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Queen · Answer 1

B. The loss on the debt extinguishment is $20,500.

Explanation:

Maturity value $745,000

Less Accrued interest $750,000

Difference $-5,000

Hence,

Discount on bonds payable $5,000 - $25,500 = - 20,500.

The loss ($20,500) is the difference between the book value ($724,500) and the amount paid ($745,000) to retire the bonds which is a loss results because the payment is far greater than the actual book value.