Problem: On January 1, 2011, Hobbies Inc sold 10 year term bonds with a face value of $1,000,000. The bonds carried a coupon rate of 5% paid annually. The market rate on the date the bonds were issued was 6%. The proceeds that were received by Hobbies Inc. upon issuance of the bonds were $940,000.
A. How much actual interest must Hobbies Inc pay to bondholders in 2011?
B. How much will Hobbies Inc. recognize as interest expense in 2011 (using the effective interest method)?
C. What is the amount of bond discount amortized in 2011 (using the effective interest method)?
D. What is the book value of the bonds as of January 1, 2012, following payment of the interest for 2011?