On January 1, year 2, Southern Corporation received $107,720 for a $100,000 face amount, 12% bond, a price that yields 10%. The bonds pay interest semiannually. Southern elects the fair value option for valuing its financial liabilities. On December 31, year 2, the fair value of the bond is determined to be $106,460. Southern recognized interest expense of $12,000 in its year 2 income statement. What was the gain or loss recognized on the year 2 income statement to report this bond at fair value?

$12,000 loss

$13,260 loss

$6,460 gain

$1,260 gain