Reference no: EM132657583
Question - On January 1, 2018, Green Pea Corp. issued $100 million of its 8%, 10-year bonds for $87.55 million (note: this is the present value of the bonds on 1/1/2018). The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. Green Pea Corp. records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2018, the fair value of the bonds was $83 million as determined by their market value in the over-the-counter market. Below is a partial discount amortization table for this bond:
|
Date
|
Cash Paid
|
Interest Expense
|
Discount Amortization
|
Present Value of the Bonds
|
|
1/1/18
|
|
|
|
87,550,000
|
|
6/30/18
|
4,000,000
|
4,377,500
|
377,500
|
87,927,500
|
|
12/31/18
|
4,000,000
|
?
|
?
|
?
|
Using the effective-interest method, what are the interest expense and the present (or book) value of the bonds on 12/31/2018, respectively?
a. $4,377,500 and $88,305,000, respectively
b. $4,377,500 and $87,549,500, respectively
c. $4,396,375 and $88,323,875, respectively