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A bond with a $100,000 face amount and a $3,000 credit balance in Premium on Bonds Payable is called at 98. What gain or loss arises on redemption?
ALoss of $5,000
BGain of $5,000
CGain of $2,000
DLoss of $2,000
Answer & Solution
Correct answer: B. Gain of $5,000
1. Carrying amount = face plus premium: \$100{,}000 + \$3{,}000 = \$103{,}000.
2. Redemption amount at 98 = \$100{,}000 \times 98\% = \$98{,}000.
3. Paying less than carrying amount is a gain: \$103{,}000 - \$98{,}000 = \$5{,}000.
4. The gain is $5,000. Option A mislabels the direction; cash paid is below carrying amount, so it is a gain.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §5.4 "Calling Bonds", p.236_
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