Question

Kirby, Inc.'s newest bonds have a face value of $100,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that

Question 2 options:

a)	the effective rate of interest exceeded the stated rate.

b)	the market and nominal rates coincided.

c)	the stated rate of interest exceeded the market rate.

d)	no necessary relationship exists between the two rates.

Under the effective-interest method of bond amortization, interest expense is equal to

Question 3 options:

a)	the market rate of interest multiplied by the face value of the bonds.

b)	the stated rate multiplied by the beginning-of-period carrying amount of the bonds.

c)	the market rate multiplied by the beginning-of-period carrying amount of the bonds.

d)	the stated rate of interest multiplied by the face value of the bonds.

At December 31, 2016 Walker Corporation showed the following balances related to its latest bond issue:

Bonds Payable	$5,000,000
Discount on Bonds Payable	350,000
Interest Payable	100,000
Unamortized Bond Issue Costs	240,000

Presume the bonds are retired on January 1, 2017, at 102. What is the amount of loss on redemption of the bonds?

Question 5 options:

a)

$540,000

b)

$740,000

c)

$690,000

d)

$640,000

Answer 1

Solution 2:

If the bonds were issued at a premium, this indicates that "the stated rate of interest exceeded the market rate."

Hence option c is correct.

Solution 3:

Under the effective-interest method of bond amortization, interest expense is equal to "the market rate multiplied by the beginning-of-period carrying amount of the bonds."

Hence option c is correct.

Solution 5:

Carrying value of bond December 31, 2016 = $5,000,000 - $350,000 = $4,650,000

Retirement value of bond = $5,000,000*102% = $5,100,000

Amount of loss on redemption of the bonds = $5,100,000 - ($4,650,000 - $240,000) = $690,000

Hence option c is correct.