Exercise 3-4:

Cybernetics Inc. issues $60 million of 5% three-year bonds with coupon paid at the end of every year. The effective interest rate at the beginning of Years 1,2, and 3 was 8%, 5%, and 2%.

1. Determine what Cybernetics would have raised from the bond issue
2. Assume Cybernetics decides to account for the bonds using the amortized cost method. Determine the interest and bond amortization of each of the three years
3. Assume Cybernetics decides to account for the bonds using the fair value method. Determine the interest, unrealized gain/loss, and total expenses for each of the three years
4. Explain why the amounts charged to income every year differ under the two methods