I hope someone can help me this time. I'm having a hard time understanding bonds, interest and amortization if someone can please help.
On January 2, 2008 a company issued 500,000, 10-year bonds for 574,540. The bonds pay interest on june 30, and December 31. The face rate is 8% and the market rate is 6%.
1.The interest expense on the bonds at june 30, 2008 is.
a. 2,764 b. 17,236 c. 20,000 d. 22.764 My answer is B.
2. The annual cash payment (paid in semiannual payments) on the bonds is:
a. 40,000 b. 30,000 c. 20,000 d. 15,000
My answer was A.
3. What is the carrying value of the bonds after the first interest payment is made on June 30, 2008
a. 574,540 b. 571,776 c. 568,920 d. 500,000
My answer was B.
4. What is the carrying value of the bonds at the end of 10 years?
a. 574,540 b. 525,000 c. 500,000 d. 425,460
My answer is C.
5.At the maturity date, besides an interest payment, the company would repay the bondholders:
a. 574,540 b. 520,000 c. 500,000 d. only the last interest payment
My answer is C.
This is the question I'm really confused about, I must have something wrong above because I just can't figure it out.
If the company redeems the bonds at a call price of 102 at December 31, 2008, after using the effective interest method for the year, what is the amount of the gain or loss.
a. Gain of 58,929 b. Loss of 58,929 c. Gain of 59,012 d. Loss of 59,012

Hi There

May be my blog post on effective interest method be able answer some of your questions.

http://teachmeaccounting.blogspot.com/

Now on your last question there is a gain on early retirement of bonds at Dec 31' 2008...the carrying value of the bonds as of that date is $ 568,929. However, the cost to reacquire the bonds is $ 510,000. Thus the company has a gain of $ 58,929.

Thanks