a company issued $1,000,000 of 8%, 10-year bonds on June 30, 2014 for $1,018,000

Question

a company issued $1,000,000 of 8%, 10-year bonds on June 30, 2014 for $1,018,000. The bonds have semiannual interest payments on December 31 and June 30. The company uses straight line method to amortize discount or premium and its year-end is December 31.

a. Was the market rate of interest higher, lower or the same as the stated interest rate?

b. Were the bonds issued at par, at a discount, or at a premium?

c. How much interest did the company show for the year ended December 31, 2014? d. hat was the carrying amount of the bonds on December 31, 2014?

Explanation / Answer

When market interest rates increase, the market value of an existing bond decreases. When market interest rates decrease, the market value of an existing bond increases. In the given case, company issued $ 1000000 bonds for $ 1018000 however the price is cum interest price. Ex interst price= 1018000-Interest paid on June 40000=960000 market value of bond is less than Actual value a. hence market interest rate will be more than stated interest rate b. bonds were issued at a price greater than actual price however the price is cum interest price. Ex interst price= 1018000-Interest paid on June 40000=960000 Actual value of bonds = 1000000 Bonds were issued at a discount of 1000000-960000=40000 c. Interest= 1000000*8%*6/12=40000 Cost of bond= 960000 Interest for Dec 31 2014 = 40000 Transfering interest payable on bond to bond outstanding value Carrying amount of bond= 960000+40000=1000000

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