Question 1 - Assume Kelly Corporation uses the effective interest rate method for amortizing bond premiums and discounts. Kelly Corporation issued bonds on January 1, Year1. The bonds have a face value of $291000 and mature in 15 years. The stated interest rate is 4%. The market rate at date of issue was 6%. The bond pays interest annually on December 31.
1. How much interests will the bond pay on December 31, Year1?
2. What was the issue price of the bond?
Question 2 - Assume Carrie Corporation uses the effective interest rate method for amortizing bond premiums and discounts. Carrie Corporation issued bonds in an earlier year. The bonds have a face value of $120000. The stated interest rate is 10%. The bond pays interest annually on December 31. The market rate of interest when the bonds were issued was 8%. On December 31 of the current year, immediately before recording the annual interest payment, the carrying value of the bonds was $132494. The market interest rate on this date is 6.5%. Round any interest payment and interest expense computations to the nearest dollar as you do computations.
1. Was the bond originally issued at a premium or a discount?
2. What is the carrying value of the bonds on after the interest payment is made in the current year?
3. What is the carrying value of the bonds at maturity?