Response to the following problem:
On the date of bond authorization, Esther Corporation issued $100,000 of callable bonds. Bond indenture information included the following:
Date of authorization January 1, 2015
Term 3 years
Interest rate 12%
Interest payment dates Semi-annually on June 30 and December 31
Required:
Consider these three cases.
Case A: the bonds are issued at face value.
Case B: the bonds are issued for $103,000.
Case C: the bonds are issued for $94,000. For each case:
1. Calculate
a. The amount of interest paid every interest payment date
b. The amount of amortization to be recorded at each interest payment date as applicable (Use the straight-line method of amortization.)
2. Prepare journal entries to record
a. The issue of bonds on January 1, 2015
b. The payment of interest on June 30, 2015
c. The amortization on June 30, 2015
d. The payment of interest on December 31, 2015 e. The amortization on December 31, 2015
f. The payment of interest on December 31, 2017 g. The amortization on December 31, 2017
h. The redemption of the bonds at maturity, January 1, 2018.
3. Calculate the amount of interest expense shown in the income statement at December 31, 2015. Is this amount the same as cash interest paid by Esther? Why or why not?
4. Assume now that on December 31, 2016, the corporation exercised a call feature included in the bond indenture and retired $50,000 of face value bonds issued January 1, 2015. The bonds were called at 102. Prepare the December 31, 2016 journal entry to record the exercise of the call option. Assume interest has been paid and the discount or premium amortized for the period ended December 31, 2016.