In 20x6, the Fender Corporation was authorized to issue $60,000,000 of sixyear unsecured bonds. The bonds carried a face interest rate of 9 percent, payable semiannually on June 30 and December 31. The bonds were callable at 105 any time after June 30, 20x9. All of the bonds were issued on July 1, 20x6 at 95.568, a price yielding an effective interest rate of 10 percent. On July 1, 20x9, the company called and retired half the outstanding bonds.

Required 1. Prepare a table similar to Table 1 to show the interest and amortization of the bond discount for 12 interest payment periods, using the effective interest method. (Round results to the nearest dollar.)

2. Calculate the amount of loss on early retirement of one-half of the bonds on July 1, 20x9.

3. Assume the bonds are also convertible at the rate of 25 shares of $10 par value common stock for each $1,000 bond and that the other half of the bonds were converted on July 1, 20x9. Calculate the amounts at which Common Stock and Additional Paid-in Capital would be increased as a result of this transaction.

4. User Insight: Under the effective interest method used in this problem, does interest expense exceed cash paid for interest or is it less? Explain your answer. Also explain why interest expense differs for each six-month period. What role does materiality play in the choice of the effective interest method?

Alternate Problems Bond Basics—Straight-Line Method, Retirement and Conversion