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# Bond Issue Cost, Interest Expenses & Gain

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1. On January 1, 2011, an investor paid \$306,000 for bonds with a face amount of \$360,000. The stated rate of interest is 11% while the current market rate of interest is 13%. Using the effective interest method, how much interest income is recognized by the investor in 2011 (assume annual interest payments and amortization)?

2. During the year, Hamlet Inc. paid \$22,000 to have bond certificates printed and engraved, paid \$110,000 in legal fees, paid \$12,000 to a CPA for registration information, and paid \$190,000 to an underwriter as a commission. What is the amount of bond issue costs?

3. On February 1, 2010, Pat Weaver Inc. (PWI) issued 10%, \$1,700,000 bonds for \$2,000,000. PWI retired all of these bonds on January 1, 2011, at 104. Unamortized bond premium on that date was \$176,800. How much gain or loss should be recognized on this bond retirement?

#### Solution Preview

Sol. 1

Interest Income using effective rate will be = 306,000*13% = \$39,780

The difference of 2% (13%-11%) will be added to ...

#### Solution Summary

The solution computes bond issue cost, bond interest expenses and gain or loss on bond retirement.

\$2.19

## ABC Corp: Compute depreciation and sale of asset. Aaron Co: Bond issue, interest

ABC Corporation purchased new machinery for \$600,000. It paid \$60,000 down and financed the balance for 3 years at 10% interest. The equipment was put into service on January 1st, 2001. At that time, the useful life was estimated as 10 years with a \$90,000 salvage value. Straight line depreciation method was selected for both tax and financial reporting purposes. Make the appropriate journal entries needed for each of the independent assumptions given below. That means you refer to the original data as you work each part. (December 31 is the end of its accounting period. (Books are closed on Dec. 31)

a. On January 1, 2004, the service life of the equipment was revised to a total of 12 years (that is, 9 years remaining as of Jan. 2004). Salvage value was revised to \$42,000. Calculate the amount of depreciation expense for 2004.

b. Refer to original data:
On January 1, 2005 a major overhaul on the machinery was made, extending its life by 2 extra years. The cost of the overhaul was \$40,000. The salvage value was estimated at \$36,000 at the end of 2012. Calculate the amount of depreciation expense for the year ending December 31, 2005. (Refer to original data)

c. Refer to original data:
On June 30, 2009 the equipment was sold for \$200,000 cash. Give the journal entry to record the sale. Calculate the Gain or the Loss from disposal of equipment. (Calculate depreciation to the nearest month.)

d. Refer to original data:
On June 30, 2009 the equipment was sold for \$116,500 cash. Give the journal entry to record the sale. Calculate the Gain or the Loss from disposal of equipment. (Calculate depreciation to the nearest month.)

Aaron Company issued 20-year bonds with a total face value of \$1,000,000 when the market yield was at a rate of 10 percent a year; compounded annually (the interest is paid once a year). Aaron uses the effective interest method to amortize any premium or discount.

Use the above data to answer the following questions.

The bonds had an 8 percent coupon rate. Calculate:

a. The proceeds from this bond issue. (That is, The Issue Price)

\$________________________

b. Interest expense for the first year.

\$_______________________

c. The liability at the end of the first year (right after the first interest coupon was paid).

\$________________________

d. The liability at the end of the second year (right after the second interest coupon was paid).

\$________________________

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