Accounting for Bonds

ACCOUNTING FOR BONDS

Hemsted Corporation is considering issuing bonds on January 1, 2006, and has asked your advice concerning several matters. The firm plans to issue $800,000 of 30-year, 10 percent bonds. Bond interest payments are on January 1 and

July 1.

REQUIRED:

1. If the bonds are issued on January 1, 2006, at a price of 91.275 when the market interest rate is 11 percent, how much cash will the firm receive? Explain to the president of the corporation the amount of interest expense the firm will report on their income statement during the first year and how much cash will be paid in interest during that time.

2. If the bonds are issued on January 1, 2006, at a price of 110.319 when the market interest rate of 9 percent, how much cash will the firm receive? Explain to the president of the corporation the amount of interest expense the firm will report on their income statement during the first year and how much cash will be paid in interest during that time.