Question

1/ A company has bonds outstanding with a par value of $110,000. The unamortized premium on these bonds is $2,585. If the company retired these bonds at a call price of 99, the gain or loss on this retirement is:

Multiple Choice

$1,100 loss.

$3,685 gain.

$2,585 gain.

$2,585 loss.

$1,100 gain.

2/ A company issued 5-year, 9.50% bonds with a par value of $109,000. The market rate when the bonds were issued was 9.00%. The company received $111,294 cash for the bonds. Using the effective interest method, the amount of recorded interest expense for the first semiannual interest period is:

Multiple Choice

$5,177.50.

$10,355.00.

$5,008.23.

$9,953.54.

$2,588.75.

Answer 1

The correct answer is B.

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Par value of bond	$110,000
+ Unamortized premium	$2,585
Carrying value of bonds	$112,585
Retirement value of bond (110,000 * 0.99)	$108,900
Gain on retirement of bond	$3,685

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Hope that helps.

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