Adler Corp. issued $4,000,000 of 10-year, 4.5% bonds on January 1, 2018, at par. Interest is due annually on December 31. The market rate of interest has since increased dramatically to 8%. As such, Adler can repurchase its bonds on the open market for $3,441,000. They decided to take advantage of this situation, and on January 1, 2023, issued a new series of bonds in the amount of $3,441,000 (five-year bonds, 8% interest payable annually). The bonds were sold at par and the proceeds were used to retire the 4.5% bonds.

Adler has recorded a gain on the retirement, which increases its net income for the year.

Required:
Ignoring transaction costs and taxation effects, is Adler any better off ? Discuss.

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Journal entry for the sale of the new bonds Dr. Cash Cr. Bonds payable Journal entry to retire the old bonds Dr. Bonds payable Cr. Cash Cr. Gain on bond redemption 3,441,000 4,000,000 3,441,000 3,441,000 559,000