13. On June 30, 2016, Hardy Corporation issued $11.5 million of its 8% bonds for
ID: 2499954 • Letter: 1
Question
13.
On June 30, 2016, Hardy Corporation issued $11.5 million of its 8% bonds for $10.4 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2016, and mature on June 30, 2026. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the six months ended December 31, 2016?
a) $66,500
b) $29,000
c) $58,500
d) $60,000
14. On January 1, 2016, Zebra Corporation issued 1,500 of its 11%, $1,000 bonds at 98.4. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2026. Zebra paid $53,000 in bond issue costs. Zebra uses the straight-line amortization method. What is the bond book value reported in the December 31, 2016, balance sheet?
a) $1,538,400
b) $1,478,400
c) $2,250,000
d) $2,303,000
17.
Nickel Inc. bought $300,000 of 3-year, 7% bonds as an investment on December 31, 2015 for $321,000. Nickel uses straight-line amortization. On May 1, 2016, $60,000 of the bonds were redeemed at 118. As a result of the retirement, MSG will report (Do not round intermediate calculations and round final answer to nearest whole dollar.):
a) $9,000 loss
b) $7,067 loss
c) $12,000 gain
d) $7,067 gain
On June 30, 2016, Hardy Corporation issued $11.5 million of its 8% bonds for $10.4 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2016, and mature on June 30, 2026. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the six months ended December 31, 2016?
a) $66,500
b) $29,000
c) $58,500
d) $60,000
14. On January 1, 2016, Zebra Corporation issued 1,500 of its 11%, $1,000 bonds at 98.4. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2026. Zebra paid $53,000 in bond issue costs. Zebra uses the straight-line amortization method. What is the bond book value reported in the December 31, 2016, balance sheet?
a) $1,538,400
b) $1,478,400
c) $2,250,000
d) $2,303,000
17.
Nickel Inc. bought $300,000 of 3-year, 7% bonds as an investment on December 31, 2015 for $321,000. Nickel uses straight-line amortization. On May 1, 2016, $60,000 of the bonds were redeemed at 118. As a result of the retirement, MSG will report (Do not round intermediate calculations and round final answer to nearest whole dollar.):
a) $9,000 loss
b) $7,067 loss
c) $12,000 gain
d) $7,067 gain
Explanation / Answer
13. Interest Expenses on Bond for June, 2016 = $ (11.5*8%*1/2)
= $ 0.46 Million
Discount on issue of 8 % bond = $ 11.5 - 10.4
= $ 1.1 Millions
The bond discount of $ 1.1 Millions must be amortized to Interest Expense over the life of the bond. The amortization will cause the bond's book value to increase from $ 10.4 Million on June 30, 2016 to $ 11.5 Millions just prior to the bond maturing on June 30, 2026.
Interest Payment Stated 4% FV = 11.5 Millions* 4% = 0.46 Millions
Interest Expenses Market 5% BV = 10.4 Millions* 4% = 0.52 Millions
Amortization of bond discounts = 0.52-0.46 = 0.06 Millions
Therefore, the bond discount should be reduced for the six months ended December 31, 2016 using the effective interest method is $ 60,000. i.e. Option D
14.
15. Let the face value of each bond = $ 100
Therefore no. of bond sold on 1st May 2016 = 60000/100 = 600
Sale consideration = $ 600* 118 = $ 70800
Cost of 600 7% bonds = (321000/300000*60000) - [(21000*4/36)/300000*60000] = $ 63733
Therefore, gain on sale of bonds = $ 70800 - 63733
= $ 7067
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