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Unformatted text preview: t income $27,000 (3,517) $23,483 The loss is not a decrease in the wealth of the company if it intends to keep the bonds outstanding until
maturity. However, if Beasley intends to retire this debt, the loss represents a decrease in wealth
because Beasley will sacrifice net assets of $3,517 to do so.
d.
Extraordinary Realized Loss on Retirement of Debt
Bonds Payable 3,517
100,000
Discount on Bonds Payable 5,350
Cash 98,167
Once the repurchase has occurred, the loss has been realized because a reduction in net assets has
occurred. Before this occurs, however, the loss is unrealized and may be misleading if the company
intends to keep the bonds until maturity. E11–21
a. The effective interest rate can be calculated in two ways. The first way is by solving for i in the following
equation where n=2 since there are two periods until maturity (12/31/12, the balance sheet date and
maturity at 12/31/14).
$193,059 = [($200,000 (1 + i )2] + {$10,000 [(1 – [(1 + i)2 + i ]}
The second way is by trial and error. Simply plug an interest rate into the equation above until the
righthand side of the equation equals the left hand side. Since the bond is issued at a discount, we start
with the knowledge that the effective rate is greater than the stated rate of 5%. The annual effective
interest rate for the bonds is 6.92%. b. To determine the effective rate an investor would be earning if the bonds were purchased on 12/31/12 at
the market value of $186,479, perform the same procedure using the equation.
$186,479 = [($100,000 (1 + i )2] + {$5,000 [(1 – [(1 + i)2 + i ]}
The annual effective interest rate for the bonds is 8.83%. c. The book value of the bonds on Cohort Enterprises’ books at December 31, 2012 is $193,059. The market
value of the bonds as of December 31, 2012 is $186,479. The difference represents a gain of $6,580. It is
a gain because if Cohort Enterprises were to repurchase these bonds on the market in order to retire
them, it would have to pay $6,580 less than the boo...
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This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.
 Fall '08
 staff
 Accounting

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