What is a Gain on Retirement of Bonds?

A gain on retirement of bonds occurs when a bond issuer buys back bonds for less than the amount of the associated liability. A bond buy-back may be accomplished by acquiring the bonds on the open market, or by calling the bonds under the terms of a callable bond clause in the bond agreement. The liability is the carrying amount of the bonds; this is the face value of the bonds, minus any unamortized discount (or plus any unamortized premium), minus any unamortized bond issuance cost.

Presentation of a Gain on Retirement of Bonds

A gain on retirement of bonds is a financial gain, rather than an operating gain, and so is classified in the income statement as a non-operating item. This presentation clarifies the income from operations for financial statement readers, which would not have been the case if the gain had been included in income from operations.

Example of a Gain on Retirement of Bonds

As an example of a gain on retirement of bonds, a company issued $100,000 of bonds five years ago at a premium of $5,000. The unamortized balance of the premium is now $4,000. The carrying amount of the bond is therefore $104,000. The company buys the bonds back for $102,000. The difference between the repurchase price and the carrying amount is $2,000, which is the gain the company can recognize on the retirement of bonds.