CA14-2. (Bond Theory: Price, Presentation, and Redemption) OnMarch 1, 2017, Sealy Company sold its 5-year, $1,000 face value, 9%bonds dated March 1, 2017, at an effective annual interest rate(yield) of 11%. Interest is payable semiannually, and the firstinterest payment date is September 1, 2017. Sealy uses theeffective-interest method of amortization. The bonds can be calledby Sealy at 101 at any time on or after March 1, 2018.
Instructions
(a) 1.How would the selling price of the bond be determined?
(a) 2.Specify how all items related to the bonds would bepresented in a balance sheet prepared immediately after the bondissue was sold.
(b) What items related to the bond issue would be included inSealy's 2017 income statement, and how would each bedetermined?
(c) Would the amount of bond discount amortization using theeffective-interest method of amortization be lower in the second orthird year of the life of the bond issue? Why
(d) Assuming that the bonds were called in and redeemed on March1, 2018, how should Sealy report the redemption of the bonds on the2018 income statement? (AICPA adapted)
