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Bond reacquisition - Gain/Loss

On January 1, 2001, Gonzalez Corporation issued $4,500,000 of 10% ten-year bonds at 103. The bonds are callable at the option of Gonzalez at 105. Gonzalez has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective-interest method).

On December 31, 2007, when the fair market value of the bonds was 96, Gonzalez repurchased $1,000,000 of the bonds in the open market at 96. Gonzalez has recorded interest and amortization for 2007. Ignoring income taxes and assuming that the gain is material, Gonzalez should report this reacquisition as either:

1. loss of 49,000
2. gain of 61,000
3. gain of 49,000
4. loss of 61,000

Solution Preview

The bond premium is 135,000 (issued at 103 implies 3% premium - 4,500,000X3%=$135,000).
The premium amortized till Dec 31,2007 is ...

Solution Summary

The solution explains how to calculate the gain / loss on bond repurchase