PROBLEM $3-4$

Bond Accounting

CHECK

$($a$)$ $$55\mathrm{.}36$ million

Cybernetics Inc. issued $$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 $2\%.$

Required:

a$.$ Determine what Cybernetics would have raised from the bond issue.

b$.$ Assume Cybernetics decides to account for the bonds using the amortized cost method. Determine the interest and bond amortization for each of the three years.

c$.$ Assume Cybernetics decides to account for the bonds using the fair value method. Determine the interest, unrealized gain$/$loss$,$ and total expense for each of the three years.

d$.$ Explain why the amounts charged to income every year differ under the two methods.