On March 1, Year 1, Somar Co. issued 20-year bonds at a discount. By September 1, Year 6, the bonds were quoted at 106 when Somar exercised its right to retire the bonds at 105. The amount is material and considered to be unusual in nature and infrequently occurring with respect to Somar Co. How should Somar report the bond retirement on its Year 6 income statement under U.S. GAAP?
a.A loss in continuing operations.
b.An extraordinary loss.
c.A gain in continuing operations.
d.An extraordinary gain.
Answer:B
Choice "B" is correct. The settlement price is greater than the face value of the debt and the face value is greater than the book value. Therefore, the settlement price is greater than the book value and a loss would be recognized on the transaction. This loss would be classified as "extraordinary" because it meets the U.S. GAAP criteria.