A company has bonds outstanding with a par value of $400,000. The unamortized premium on these bonds is $2,000. The company retired these bonds by buying them on the open market at 97. What is the gain or loss on this retirement?
400,000 + 2,000 = $402,000 carrying value
The bonds were repurchased at 97. That means 97% of the face value
400,000 x 97% = 388,000 purchase price.
When the carrying value is more than the cash paid, there is a gain.
402,000 - 388,000 = $14,000 Gain