(Accounting for bonds, LO 3, 4) On May 1, 2003 Kuldo Inc. (Kuldo) issued a

$20,000,000 bond with a 7% coupon rate and a maturity date of April 30, 2007.

Interest will be paid semi-annually on April 30 and October 31. Kuldo’s year end is December 31. The effective interest rate for a bond of this type on May 1, 2003 was 9%.

Required:

a. What will be the proceeds from the bond issue?

b. Prepare the journal entry to record issue of the bond on May 1, 2003.

c. Prepare an amortization schedule using both the straight-line and effective interest methods for any premium or discount that arose from the issue of the bond.

d. Prepare the journal entry required to accrue the interest expense and interest payable on December 31, 2005. Make the entry for both the straight-line and effective interest amortization methods.

e. Prepare the journal entry required to record the interest expense and the payment to investors on April 30, 2006. Make the entry for both the straight-line and effective interest amortization methods.

f. Prepare the journal entry required to record the retirement of the bond on maturity. Include the interest expense and amortization of any bond premium or discount in the entry. Make the entry for both the straight-line and effective interest amortization methods.

g. Assume that Kuldo’s bond agreement allowed the company to redeem the bond on April 30, 2005 for $22,500,000. Prepare the journal entry required to record early retirement of the bond.

h. Assume the role of a shareholder in Kuldo. How would you interpret the gain or loss that would be reported on Kuldo’s income statement as a result of the early retirement of the bond? Explain.