On March 2, 2016, Wesley Company sold its 5-year, $1,000 face value, 8% bonds da

Question

On March 2, 2016, Wesley Company sold its 5-year, $1,000 face value, 8% bonds dated March 2, 2016, at an effective annual interest rate (yield) of 10%. Interest is payable semiannually, and the first interest payment date is September 2, 2016. Wesley uses the interest method of amortization and incurred bond issue costs in preparing and selling the bond issue. Wesley can call the bonds at 101 at any time on or after March 2, 2017.

Based on the above information, answer the following questions:

1. How does the company determine the selling price of the bonds?

2. Specify, how the company presents all items related to the bonds in a balance sheet prepared immediately after the bond issue is sold. 2. What items related to the bond issue does Wesley include in its 2016 income statement, and how does it determine each?

3. Will the amount of bond discount amortization using the interest method of amortization be lower in the second or third year of the life of the bond issue? Why?

4. Assuming that the bonds are called in and retired on March 2, 2017, how does Wesley report the retirement of the bonds on the 2017 income statement?

Explanation / Answer

1. selling price of bond   

   Yield = annual coupan rate / selling price

0.10 = ($1000 * 8% ) / Selling price

   0.10 = 80 /selling price

   selling price = $800

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