At t=0, a company issues a 4 year bond payable with a face value (principal) of $10,000. The B/P pays coupons of $1,000 every year for the first 2 years (Year 1 and Year 2); the B/P pays zero coupons for the last 2 years( for Year 3 and Year 4). Assume a discount rate of 10% per year. Calculate to the nearest dollar
Show calculations.
Required:
a. What interest expense, if any, is reported on Year 3 I/S?
b. Suppose the B/P is retired at the end of year 2 for $8,100. Prepare journal entries to record the bonds payable retirement. Assume the coupon for year 2 has been paid. (5 marks) Hint: Don’t forget the gain or loss on retirement.
- SONG Company has outstanding bonds originally issued at a premium. During 2015, the unamortized bond premium decreased from $12,978 to $10,935. Annual interest (coupon) paid was $10,800. The market rate of interest was 12% when the bond was issued.
Required.
Calculate
a. Interest expense for 2015
b. The face value of the bond, to the nearest thousand
c. The coupon rate of the bond
Sample Solution