Question

Three independent situations follow. Answer the questions at the end of each situation.

1. Mozart Inc., sold $3 million of 10-year, 10% bonds at 104 on January 1, 2008. The bonds were dated January 1, 2008, and pay interest on July 1 and January 1. If Mozart uses the straight-line method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1, 2008, and December 31, 2008.
2. Spigolo Ltd., issued $600,000 of 10-year, 9% bonds on June 30, 2007, for $562,500. This price provided a yield of 10% on the bonds. Interest is payable semi-annually on December 31 and June 30. If Spigolo uses the effective interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2007.
3. Minor Corp. sells 10% bonds having a maturity value of $2,500,000 for $2,319,761.20. The bonds are dated January 1, 2009, and mature January 1, 2014. Interest is payable annually on January 1. Prepare a schedule of interest expense and discount amortization under the effective interest method.

Answer 1

a)face value of bonds=3*10^6
sold =104%*3*10^6=3120000
unamortized premium=3120000-3000000=120000
per period it is =120000/(10*2)=6000
interest expense on july 1st: 6000
jan 1st=6000

b)face value of bonds=600000
sold =562500
unamortized discount=600000-562500=37500
interest expense on dec 31st=562500*(10%*(4/12))=18750

c) rate formulae to find ytm of bond

=rate(nper,pmt,pv,fv,type)

=RATE(5,(2500000*10%),-2319761.2,2500000,0)=12%