Ra Corporation Issues a Twenty-Year Obligation at Its $1,000 Face

question 33

Essay

Ra Corporation issues a twenty-year obligation at its $1,000 face amount. Rames purchases the obligation for $1,000 on the issue date. Due to a decline in interest rates, Ra calls the obligation by paying $1,010 to each of the holders of the twenty-year obligations. What is the tax treatment of the $1,010 by Ra and Rames?

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Definitions:

Normal Balance

The side (debit or credit) of an account that is typically increased. For example, assets and expenses usually have a debit normal balance, while liabilities, equity, and revenue have a credit normal balance.

Adjusting Journal Entry

A record made in the books to correct or update financial statements prior to issuing them, ensuring they reflect true values.

Fees Earned

Revenue generated from providing services, as opposed to selling goods, in a given period.

Prepaid Expense

An expense that has been paid in advance and will be recognized as an expense in a future accounting period.