Answer:
June 1, 2016, outstanding bonds are repurchased at 98
Dr Bonds payable 10,000,000
Dr Premium on bonds payable 230,000
Cr Cash 9,800,000
Cr gain on extinguishment of bonds 430,000
Explanation:
Bonds have to be reported at historical cost plus any premiums or minus any discounts. Since the bonds were sold at a premium, the market interest must have been lower than the bonds' coupon. But market interest rates change over time, and now they are higher than the coupon that the bonds pay. This will result in a lower market price, and if the company repurchases them, the transaction will result in a gain since the bonds' carrying value is higher than the price paid to repurchase them.
