Problem: On March 1, 2005, ABC Company sold its 5 year, $1,000 face value, 9% bonds dated March 1, 2005 at an effective annual interest rate (yield)of 11%. Interest is payable semiannually, and the first interest payment date is Sept 1, 2005. ABC 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 ABC at 101 at any time on or after March 1, 2006.
Instructions:
1.) Explain in your own words how the selling price would be determined.
2.) Describe how all items related to the bonds would be presented in a balance sheet prepared immediately after the bond issue was sold.
3.) 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?
4.) Assuming that the bonds were called in and retired on March 1, 2006, describe how should ABC report the retirement of the bonds on the 2006 income statement.