The bonds have a stated interest rate of 5 percent and will mature on December 31, 2014.
The market value of the bonds as of December 31, 2012, is $186,479.
a. Compute the effective interest rate when the bonds were issued.
b. What effective rate would an investor be earning by purchasing the bonds on December 31, 2012, at the market price and holding the bonds until maturity?
c. Assume that Cohort reported net income of $38,500 for the period ending December 31, 2012. Adjust net income for the gain or loss experienced by the company on these outstanding bonds due to the change in market interest rates. Ignore income taxes. Do you believe that the gain or loss represents an\ increase or a decrease in the wealth of the company? Why?
d. Assume that Cohort retired the bonds by purchasing them on the open market. Record the journal entry, and compare the gain or loss recognized on the retirement with the gain or loss computed in (c) above. Discuss.