Purpose: This exercise will enable you to practice identifying data required to perform computations involving bonds payable and applying the terminology associated with bonds.
On January 1, 2014, Tuna Fishery sold $100,000 (face value) worth of bonds. The bonds are dated January 1, 2014 and will mature on January 1, 2019. Interest is to be paid annually on January 1. Issue costs related to these bonds amounted to $2,000, and these costs are being amortized by the straight-line method. The following amortization schedule was prepared by the accountant for the first 2 years of the life of the bonds:
Date
1/1/14
1/1/15
1/1/16
Stated Interest
$ 7,000.00
7,000.00
Effective Interest
$ 6,252.74
6,207.91
Amortization
$ 747.26
792.09
Carrying Value of Bonds
$ 104,212.37
103,465.11
102,673.02
Instructions
On the basis of the information above, answer the following questions (round your answers to the nearest cent or percent) and explain the reasoning or computations, as appropriate.
(a) What is the nominal or stated rate of interest for this bond issue?
(b) What is the effective or market rate of interest for this bond issue?
(c) Prepare the journal entry to record the sale of the bond issue on January 1, 2014, including the issue costs.
(d) Prepare the appropriate entry(ies) at December 31, 2016, the end of the accounting year.
(e) Identify the amount of bond issue costs and the amount of interest expense to be reported on the income statement for the year ended December 31, 2016.
(f) Show how the account balances related to the bond issue will be presented on the December 31, 2016 balance sheet. Indicate the major classification(s) involved.
(g) What is the book value of the bonds at December 31, 2016?
(h) What is the net book value of the bonds at December 31, 2016?
(i) If the bonds are retired for $100,500 (excluding interest) at January 1, 2017, will the bonds be retired at a gain or a loss? What is the amount of that gain or loss? Where will it be reported on the income statement for the year ending December 31, 2017?