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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?

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    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.