INTRA-ENTITY DEBT TRANSACTION

Assume that Astro Company possesses an 80 percent interest in the outstanding voting stock of Orion Company. On January 1, 2023, Orion issued $1 million in 10-year bonds paying cash interest of 9 percent annually. Because of market conditions prevailing on that date, Orion sold the debt for $938,555 to yield an effective interest rate of 10 percent per year. Shortly thereafter (two years later), the interest rate began to fall, and by January 1, 2025, Orion made the decision to retire this debt prematurely and refinance it at a currently lower rate. To carry out this plan, Astro purchased all of these bonds in the open market on January 1, 2025, for $1,057,466. This price was based on an effective yield of 8 percent, which is assumed to be in line with the interest rates at the time. The effective interest method is used for all amortization of premiums and discounts on the bonds.

Compute the following:

• Annual interest amount the bonds pay per year.

Calculate the effective interest expense for 12/31/2023 and 12/31/2024.

Calculate the difference between the interest paid and the interest expense calculated for 12/31/2023 and 12/31/2024.

Calculate the book value of the bonds on January 1, 2025.

Calculate the difference between the new purchase price and the book value of the bonds on January 1, 2025.