Asked by Angelstar Kasper on May 13, 2024
Verified
A material gain earned when retiring bonds before their maturity date is recognized by
A) amortizing it over the remaining life of the bond
B) making a prior period adjustment
C) reporting it as an extraordinary item in the year of retirement
D) reporting it as an ordinary item in the year of retirement
Bonds Before Maturity
The buying or selling of bonds in the financial markets before they have reached their specified maturity date.
Extraordinary Item
A term used in accounting to describe events and transactions that are both unusual and infrequent in nature, significantly affecting a company's financial position.
- Understand the accounting treatment for the retirement of bonds before their maturity and the recognition of material gains or losses.
Verified Answer
AA
Abhinav AnandMay 18, 2024
Final Answer :
D
Explanation :
When retiring bonds before their maturity date, any material gain earned should be reported as an ordinary item in the year of retirement. This gain represents a reduction in the cost of borrowing, so it is not an extraordinary item that is both infrequent and unusual in nature. Amortizing the gain over the remaining life of the bond would be inappropriate because the bond has been retired and is no longer outstanding. Making a prior period adjustment would only be necessary if there was an error in a previous financial statement.
Learning Objectives
- Understand the accounting treatment for the retirement of bonds before their maturity and the recognition of material gains or losses.