Question

Butler, Inc. paid $75,000 to retire a note with a face value of $83,000. The note was issued with an 8% coupon rate paid semiannually. The note was three years from maturity and had a net book value of $68,200. What is the net gain or loss on the redemption of the note? A. $6,800 loss B. $8,000 gain C. $8,000 loss D. $6,800 gain E. None of the above

Answer 1

Answer:

Option (A) is correct.

Explanation:

Given that,

Amount paid to retire a note = $75,000

Face value of a note = $83,000

Coupon rate = 8% (Paid semi-annually)

Net book value of a note = $68,200

The net gain or loss on the redemption of the note is determined by the difference between the net book value of the note and the amount paid to retire the note. A negative amount indicates that there is a loss on the redemption and a positive amount indicates that there is a gain on the redemption.

Net gain or loss:

= Net book value of a note - Amount paid to retire a note

= $68,200 - $75,000

= -$6,800

Therefore, there is a net loss of $6,800 on the redemption of the note.