On March 1, 2011, Sealy Company sold its 5-year, $1,000 face value, 9% bonds dated March 1, 2011, at an effective annual interest rate (yield) of 11%. Interest is payable semiannually, and the first interest payment date is September 1, 2011. Sealy uses the effective-interest method of amortization. Bond issue costs were incurred in preparing and selling the bond issue. The bonds can be called by Sealy at 101 at any time on or after March 1, 2012.
Instructions
(a)
(1) How would the selling price of the bond be determined?
(2) Specify how all items related to the bonds would be presented in a balance sheet prepared immediately after the bond issue was sold.
(b) What items related to the bond issue would be included in Sealy's 2011 income statement, and how would each be determined?
(c) Would the amount of bond discount amortization using the effective-interest method of amortization be lower in the second or third year of the life of the bond issue? Why?
(d) Assuming that the bonds were called in and retired on March 1, 2012, how should Sealy report the retirement of the bonds on the 2012 income statement?