Amortization of a  Bond Discount and PremiumOn September 1, 2011 , Park Rapids Lumber Comp...

Amortization of a  Bond Discount and Premium

On September 1, 2011 , Park Rapids Lumber Company issued $80 million in 20-year, 10percentbonds payable. Interest is payable semiannually onMarch 1and September 1. Bond discounts andpremiums are amortized at each interest payment date and at year-end. The company’s fiscal yearends at December 31.

Instructions

a. Make the necessary adjusting entries atDecember 31 , 2011 , and the journal entry torecord the payment ofbond interest onMarch I, 2012, under each ofthefollowing assumptions:

1. The bonds were issued at 98. (Round to the nearest dollar.)

2. The bonds were issued at 101. (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 of the above assumptions, 1or 2, would the investor’s effective rate ofinterest be higher? Explain.