Question

Clabber Company has bonds outstanding with a par value of $100,000 and a carrying value of $97,300. If the company calls these bonds at a price of $95,000, the gain or loss on retirement is:
$5,000 loss
$2,700 gain
$2,700 loss
$2,300 loss
$2,300 gain

Answer 1

Concepts and reason

Bond: An instrument used by a company to raise its capital by way of debt is called a bond. It is one of the company’s long-term liabilities. It is a type of loan which the company is obliged to repay to the holder of the bond after a definite time period.

Fundamentals

Callable bonds: It refers the bond which can be redeemed by the issuer of bonds at any time before the date of maturity. Under this, the issuer has the right instead of an obligation to buy back the bonds. It is also known as redeemable bonds.

Par Value of bonds: It refers to the amount stated on bonds at the time of bond issuance. It is also referred to as face value.

Carrying value of bonds: The sum total of the face or par value of the bonds and any premium that is unamortized or the difference between the face or par value and the discounts which are unamortized is referred to as carrying value of bonds.

Whenever a company redeems bonds at a price which is lesser than the carrying value of the bond, it is an indication that there is a gain on redemption, and when the bonds are redeemed at a price higher than the carrying value, the company incurs loss.

Compute the gain on the Bonds:

$\begin{array}{c}\\{\rm{Gain/}}\,\left( {{\rm{Loss}}} \right) = {\rm{Carrying}}\,{\rm{value}}\,{\rm{of}}\,{\rm{the}}\,{\rm{bond}} - {\rm{Callable}}\,{\rm{value}}\\\\ = \$ 97,300 - \$ 95,000\\\\ = \$ 2,300\\\end{array}$

Ans:

The gain at the time of retirement of bonds is $2,300.