Question:
The following information appeared in the 2011 annual report of Rumours, Inc.:
Long Term Debt
[Rumours, Inc. issued] $10 million, 10% coupon bonds on January 1, 2008, due on December 31, 2012. The prevailing market interest rate on January 1, 2008, was 12%, and the bonds pay interest on June 30 and December 31 of each year. On January 1, 2009, [Rumours issued] $10 million, 10% coupon bonds due on December 31, 2013. The prevailing market interest rate on January 1, 2009, was 8%, and the bonds pay interest on June 30 and December 31 of each year.
Required:
1. See the following (incomplete) table for each bond’s carrying value. Calculate the missing values.
Carrying value
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December 31,2010 December 31,2011
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10% bonds due in 2012 $9,653,550 ?
10% bonds due in 2013 ? $10,362,950
2. How much interest expense did Rumours record in 2011 on the bonds due in 2012?
3. How much interest expense did Rumours record in 2011 on the bonds due in 2013?