A company has a $100,000 bond payable outstanding with unamortized premium of $5,000. It retires the bond by paying $102,000. What is the gain or loss on extinguishment?

Answer options:

$3,000 Gain

$3,000 Loss

$2,000 Loss

$7,000 Gain

How to approach this question

Compare Net Carrying Value to the Reacquisition Price. If Carrying Value > Price Paid, it's a Gain.

Full Answer

A.$3,000 Gain✓ Correct

Net Carrying Value = $100,000 + $5,000 = $105,000.<br/>Cash Paid = $102,000.<br/>Gain = $105,000 - $102,000 = $3,000.<br/>(We cleared a $105k debt for only $102k).

Common mistakes

Ignoring the premium; confusing gain/loss direction.

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