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On March 1, 2017, MAD Company sold its 5-year, $1000 face value 9% callable bonds dated March 1, 2017. The effective annual interest rate (yield) is 11% and bond interest is payable semiannually with the first interest payment due on September 1, 2017. The bonds can be called by MAD company on or after March 1, 2018. Assume that MAD company uses an effective interest method for bond interest amortization. Answer the following questions: (a) Discuss how the selling price of the bond would be determined. Also show computations to support your discussion. (b) Discuss what items related to the bond issue would be included in MAD company’s 2017 income statement. Also show computations to support your discussion. (c) Assuming that the bonds were called and redeemed on March 1, 2018, discuss how the redemption of the bonds should be reported on MAD Company’s 2018 Income statement.
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