Hills Corp. called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of $200,000. To extinguish this debt, Hills had to pay a call premium of $40,000.

Ignoring income tax considerations, how should these amounts be treated for accounting purposes?

Record a $40,000 loss in the year of extinguishment and amortize $200,000 over four years.

Either amortize $240,000 over four years or record a $240,000 loss immediately, whichever management selects.

Amortize $240,000 over four years.

Record a $240,000 loss in the year of extinguishment.