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Nickel Inc. bought $500,000 of 3-year, 6% bonds as an investment on December 31, 2017 for $530,000. The investment receives interest annually and Nickel uses straight-line amortization. On May 1, 2018, the issuer retired $100,000 of the bonds at 116. As a result of the retirement, Nickel will report a:

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Answer:

the gain would be reported i.e. $10,778

Explanation:

The computation is shown below:

The Value of 100000 bonds is

= $530,000 Γ· $500,000 Γ— 100,000

= $106,000

Now

Premium amortization in 4 month is

= $7,000 Γ· 36 months Γ— 4 months

= $778

Now

Carrying value on may 1, 2018 is

= $106,000 - $778

= $105,222

Now

Retirement value is

= 100,000 Γ— 1.16

= 116,000

So,

Gain on retirement is

= 116,000 - 105,222

= $10,778

Hence, the gain would be reported i.e. $10,778

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