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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