1. Describe the two distinct obligations incurred by a corporation when issuing bonds.
2. If you asked your broker to purchase for you a 6% bond when the market interest rate for such bonds was 7%, would you expect to pay more or less than the face amount for the bond? Explain.
3. A corporation issues $10,000,000 of 6% bonds to yield in- terest at the rate of 5%. (a) Was the amount of cash received from the sale of the bonds greater or less than $10,000,000? (b) Identify the following terms related to the bond issue: (1) face amount, (2) market or effective rate of interest, (3) contract rate of interest, and (4) maturity amount.
4. If bonds issued by a corporation are sold at a premium, is the market rate of interest greater or less than the contract rate?
5. The following data relate to a $1,000,000, 6% bond issue for a selected semiannual interest period:
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Bond carrying amount at beginning of period
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$1,150,000
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Interest paid at end of period
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30,000
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Interest expense allocable to the period
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28,750
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(a) Were the bonds issued at a discount or at a premium?
(b) What is the unamortized amount of the discount or premium account at the beginning of the period? (c) What account was debited to amortize the discount or premium?