On June 30, 2024, King Company had outstanding 9% bonds payable with a face amount of P5,000,000 and maturing on June 30, 2029. Interest is payable semiannually every June 30 and December 31.
On June 30, 2024, after amortization was recorded for the period, the unamortized premium on bonds payable was P300,000. On that date, the entity acquired all outstanding bonds payable on the open market at 98 and retired them.
On June 30, 2024, what amount should be recognized as gain on redemption of bonds payable?
a. 300,000
b. 400,000
c. 100,000
d. 200,000
Answer (2)
To determine the gain on the redemption of bonds payable, we need to compare the carrying amount of the bonds with the amount paid to retire them. Here's a step-by-step breakdown:
Face Value of Bonds:
The face value of the bonds is P 5 , 000 , 000 .
Unamortized Premium on Bonds Payable:
As of June 30, 2024, the unamortized premium is P 300 , 000 .
Carrying Amount of Bonds:
The carrying amount of the bonds is the face value plus the unamortized premium.
Carrying amount = P 5 , 000 , 000 + P 300 , 000 = P 5 , 300 , 000
Redemption Price of Bonds:
The bonds were acquired at 98, which means 98% of the face value.
Redemption price = 0.98 × P 5 , 000 , 000 = P 4 , 900 , 000
Calculation of Gain on Redemption:
The gain is the difference between the carrying amount and the redemption price.
Gain = P 5 , 300 , 000 − P 4 , 900 , 000 = P 400 , 000
In conclusion, the gain on redemption of the bonds payable is P 400 , 000 . Therefore, the correct option is (b) 400,000 .
The gain on redemption of bonds payable is calculated as the difference between the carrying amount of P5,300,000 and the redemption price of P4,900,000, resulting in a gain of P400,000. Thus, the correct answer is (b) 400,000.
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