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Case 11-8 Accounting for Bonds Payable On April 1, 2006, Janine Corporation sold some of its five-year, $1,000 face value, 12 percent term bonds dated March 1, 2006, at an effective annual interest rate (yield) of 10 percent. Interest is payable semiannually, and the first interest payment date is September 1, 2006. Janine uses the interest method of amortization.
Bond issue costs were incurred in preparing and selling the bond issue. On November 1, 2006, Janine sold directly to underwriters, at lump-sum price, $1,000 face value, 9 percent serial bonds dated November 1, 2006, at an effective interest rate (yield) of 11 percent. A total of 25 percent of these serial bonds are due on November 1, 2007; a total of 30 percent on November 1, 2008; and the rest on November 1, 2009. Interest is payable semiannually, and the first interest payment date is May 1, 2007. Janine uses the interest method of amortization. Bond issue costs were incurred in preparing and selling the bond issue. Required: a. How would the market price of the term bonds and the serial bonds be determined? i. How would all items related to the term bonds, except for bond issue costs, be presented in a balance sheet prepared immediately after the term bond issue was sold? ii. How would all items related to the serial bonds, except for bond issue costs, be presented in a balance sheet prepared immediately after the serial bond issue was sold? b. What alternative methods could be used to account for the bond issue costs for the term bonds in 2006? Which method(s) is (are) considered current GAAP? Which method(s), if any, would affect the calculation of interest expense? Why? c. How would the amount of interest expense for the term bonds and the serial bonds be determined for 2006?
