Amortization of a Bond Discount and Premium
On September 1,2011, Bella Company issued $5 million in 10-year, 12 percent bonds payable.Interest is payable semiannually on March 1 and September 1. Bond discounts and premiums are amortized at each interest payment date and at year-end. The company’s fiscal year ends at December 31.
Instructions
a. Make the necessary adjusting entries at December 31, 2011, and the journal entry to record the payment ofbond interest onMarch 1,2012, under each ofthe following assumptions:
1. The bonds were issued at 98. (Roundto the nearest dollar.)
2.The bonds were issued at 98(Round to.the nearest dollar.)
b. Compute the net bond liability at December 31, 2012, under assumptions 1 and 2 above.(Round to the nearest dollar.)
c. Under which ofthe above assumptions, 1or 2,would the investor’s effective rate ofinterest be higher? Explain.
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