Problem: ABC Corporation (Gomez Corporation) issued $3,000,000 of 9%, ten-year convertible bonds on July 1, 2007 at 96.1 plus accrued interest. The bonds were dated April 1, 2007 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2008, $600,000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.
1) If "interest payable" were credited when the bonds were issued, what should be the amount of the debit to "interest expense" on October 1, 2007?
a. $64,500.
b. $67,500.
c. $70,500.
d. $135,000.
2) What should be the amount of the unamortized bond discount on April 1, 2008 relating to the bonds converted?
a. $23,400.
b. $21,600.
c. $11,700.
d. $22,200.
3) What was the effective interest rate on the bonds when they were issued?
a. 9%
b. Above 9%
c. Below 9%
d. Cannot determine from the information given.