On January 1, 2011, Avaya Corporation issued $2,000,000 in bonds that mature in five years. The bonds have a stated interest rate of 6 percent and pay interest on December 31 each year. When the bonds were sold, the market rate of interest was 7 percent. The company uses the effective-interest amortization method.
Required:
1. What was the issue price on January 1, 2011?
2. What amount of interest expense should be recorded on
(a) December 31, 2011? And
(b) December 31, 2012?
3. What amount of cash interest should be paid on
(a) December 31, 2011? and
(b) December 31, 2012?
4. What is the book value of the bonds on
(a) December 31, 2011? And
(b) December 31, 2012?