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A bond with a $100,000 face amount and a $3,000 debit balance in Discount on Bonds Payable is called at 102. What gain or loss arises on redemption?
AGain of $5,000
BLoss of $2,000
CGain of $2,000
DLoss of $5,000
Answer & Solution
Correct answer: D. Loss of $5,000
1. Carrying amount = face minus discount: \$100{,}000 - \$3{,}000 = \$97{,}000.
2. Redemption amount at 102 = \$100{,}000 \times 102\% = \$102{,}000.
3. Paying more than carrying amount is a loss: \$97{,}000 - \$102{,}000 = -\$5{,}000.
4. The loss is $5,000. Option A confuses paying-less (gain) with paying-more; here cash paid exceeds carrying amount.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §5.4 "Calling Bonds", p.235_
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