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ABC Company: Accounting for Bonds

On March 1, 2008, ABC Company sold its 5-year, $1,000 face value, xx% bonds dated March 1, 2008, at an effective annual interest rate (yield) of yy%. Interest is payable semiannually, and the first interest payment date is September 1, 2008. ABC uses the effective interest method of amortization. Bond issue costs were incurred in preparing and selling the bond issue. The bonds can be called by ABC at 101 at any time on or after March 1, 2009.

(1) In a generic sense how would the selling price of the bond be determined?

(2) Specify how all items related to the bonds would be presented in a balance sheet prepared immediately after the bond issue was sold.

B. What items related to the bond issue would be included in ABC's 2008 income statement, and how would each be determined?

C. Would the amount of bond discount amortization using the effective interest method of amortization be lower in the second and /or third year of the life of the bond issue? Why?

D. Assuming that the bonds were called in and retired on March 1, 2009, how should ABC report the retirement of the bonds on the 2009 income statement?

Solution Preview

1. The selling price of the bond is the net present value of all future cash flows asociated with the bond. The present value is calculated by discounting the future cash flows at the effective annual interest rate of yy%. The future cash flows include the maturitry amount and annual interest payments at the rate of xx%.

2. After selling the bonds, the cash would increase by the precceds from ...

Solution Summary

How to handle each event is discussed in a sentence or two for a total of 274 words.

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