CASE 10-4 ACCOUNTING FOR BONDS Startup Company decided to issue 5100,000 worth of 10%, 5-year bonds dated Januar/ 1, 2001, with interest payable semiannually on January 1 and July 1 of each year. Due to printing and other delays. Startup was not able to sell the bonds until July 1, 2001. The bonds were sold to yield 12% interest, and they are callable at 102 after January 1, 2003. The company expects interest rates to fall during the next few years and is planning to retire this bond issue and to replace it with a less costly one if the expected decline occurs.

Assume that you have just been hired as the accountant for Startup Company. The financial vice president would like you to identify the accounting issues involved with the bond transaction. You are also asked to explain v/hy the company received less than $100,000 on the sale of the bonds and to compute the anticipated gain or loss on retirement of the bonds, assuming retirement on July 1, 2003, and use of straight-line amortization.