The information below was taken from the balance sheet of Cohort Enterprises as of December 31, 2012:

Question:

(a) Compute the effective interest rate when the bonds were issued.(b) What effective rate would an investor be earning by purchasing the bonds on December 31, 2012, at the market price and holding the bonds until maturity?(c) Assume that cohort reported net income of $38,500 for the period ending December 31, 2012. Adjust net income for the gain or loss experienced by the company on these outstanding bonds due to the changed in market interest rates. Ignore income taxes. Do you believe that the gain or loss represents an increase of a decrease in the wealth of the company? Why?(d) Assume that Cohort retired the bonds by purchasing them on the open market. Record the journal entry, and compute the gain or loss recognized on the retirement with the gain or loss computed in (c) above. Discuss.

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...