1. On June 1, 2005, Tocinto Company sold its 8-year, $1,000
face value, 9% bonds dated June 1, 2005 at an effective annual interest rate
(yield) of 10%. Interest is payable semiannually, and the first interest
payment date is September 1, 2005. Tocinto 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 Tacinto at 101 at any time on or after
June 1, 2006.
Instructions:
a. Explain in your own words how the selling price would be
determined.
b. Describe how all items related to the bomds would be
presented in a balance sheet prepared immediately after the bond issue was
sold.
c. 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?
d. Assuming that the bonds were called in and retired on
March 1, 2006, describe how should Tocinto report the retirement of the bonds
on the 2006 income statement.
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