Redemption of Bonds
Elliot Company issued $100,000 face value bonds at a premium of $5,500. The bonds contain a call provision of 101. Elliot decides to redeem the bonds due to a significant decline in interest rates. On that date, Elliot had amortized only $2,000 of the premium.
Required
1. Calculate the gain or loss on the early redemption of the bonds.
2. Calculate the gain or loss on the redemption assuming that the call provision is 104 instead of 101.
3. Indicate how the gain or loss would be reported on the income statement and in the notes to the financial statements.
4. Why do you suppose the call price is normally higher than 100?