On 1/1/2001, ABC Co. issued $1,000,000 5-year bonds with a market rate of 8%. Interests are...

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Accounting

On 1/1/2001, ABC Co. issued $1,000,000 5-year bonds with amarket rate of 8%. Interests are paid annually on 12/31. The couponrate is 6%. Answer the following questions assuming that thecompany uses the effective interest method of amortization. Showyour calculations. 1. Determine the selling price of the bond onthe issue date. Is it issued at a premium or discount? 2. Give thejournal entry to record the bond issuance above. 3. How much is theinterest expense for ABC Co. for the fiscal year that ended12/31/2001? Give the journal entry to record the interest expense.4 . On 1/1/2003, ABC Co. found itself with a lot of excess cash andit will be best for them to buy back their bonds from the openmarket and retire them so as to avoid future interest payments. Themarket interest rate on 1/1/2003 is 9%. Calculate: (i) the cashamount that ABC has to pay to retire the bond (ii) the book value(i.e., net borrowing) of the bonds on 1/1/2003 (iii) gain/loss fromthe retirement (iv) provide the journal entry for the earlyretirement of bonds.

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1 Selling Price of bonds Amount PV Factor Present value Interest 60000 399271 239563 Principal 1000000 068058 680580 Selling Price of bonds 920143 Selling See Answer

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