Question

On 1/1/X1, Dolan Corp. pays $100,000 to retire its bonds early. At the time of the retirement, the bonds have a face value of $104,000 and a carrying value of $98,000. Question: What should be the amount of gain or loss, if any, the company will record as a result of the early retirement?

Answer 1

Answer: The company has to record a loss of $2,000

Explanation:

The accounting for bonds retired early would require the company to pay out cash to remove the bonds payable from its balance sheet. To determine the gain or loss, if the cash paid is less than the carrying value of the bond, then a gain is determined, if the cash paid is more than the carrying value of the bond, then a loss is determined.

From the question the company pays $100,000 which is more than the carrying value of $98,000. Therefore, the company would record a loss $2,000.