The balance sheet of Indian River Electronics Corporation as of December 31, 2017, included 12.25% bonds having a face amount of $90 million. The bonds had been issued in 2010 and had a remaining discount of $3 million at December 31, 2017. On January 1, 2018, Indian River Electronics called the bonds before their scheduled maturity at the call price of 102. How much gain or loss would Indian River Electronics Corporation recognize on the early extinguishment of the bonds?

Loss on the early extinguishment of the bonds = $4,800,000

Explanation:

Early extinguishment of the bonds occurs when the bonds issuer recalls the bonds before the maturity date. This usually happens when the market rate of the bonds falls below the rate being paid by the issuer.

Cash paid on the bonds = Face value x 102%

Cash paid on the bonds = $90,000,000 x 102%

Cash paid on the bonds = $91,800,000

Gain or loss on the early extinguishment of the bonds = Cash paid + Discounts on bonds payable - Bonds payable

Loss on the early extinguishment of the bonds = $91,800,000 + $3,000,000 - $90,000,000

Therefore, the loss on the early extinguishment of the bonds = $4,800,000

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