Gain or Loss on Bond Redemption: Inspirational Financial Analysis
How can we calculate the gain or loss on the redemption of bonds?
Given that Bramble Company has $1610000 of bonds outstanding with an unamortized premium of $35000, and redeemed the bonds at 102, what would be the gain or loss on the redemption?
A. $2800 loss
B. $32200 loss
C. $32200 gain
D. $2800 gain
Final answer:
The gain or loss on the redemption of the bonds would be $32200 loss.
Explanation:
To calculate the gain or loss on the redemption of the bonds, we need to compare the carrying value of the bonds with the redemption price. The carrying value is the face value of the bonds plus any unamortized premium or minus any unamortized discount.
In this case, the unamortized premium is $35000. Since it is a premium, we add it to the face value of the bonds to calculate the carrying value.
The carrying value of the bonds is $1610000 + $35000 = $1645000.
The redemption price is given as 102, which means the company redeems the bonds at 102% of their face value.
To calculate the redemption price, we multiply the face value of the bonds by 1.02 (102%).
The redemption price is $1610000 * 1.02 = $1642200.
Now, we can compare the carrying value with the redemption price to determine the gain or loss on redemption.
If the carrying value is higher than the redemption price, there is a gain on redemption. If the carrying value is lower than the redemption price, there is a loss on redemption.
In this case, the carrying value ($1645000) is higher than the redemption price ($1642200), so there is a loss on redemption.
Therefore, the correct answer is $32200 loss.