Adam’s Machine Tool, Inc., issued $350,000 of 10-year, 5% bonds payable on January 1. Adam’s Machine Tool, Inc., pays interest each January 1 and July 1 and amortizes any discount or premium by the straight-line method. Adam’s Machine Tool, Inc., can issue its bonds payable under various conditions:

a. Issuance at par value

b. Issuance at a price of $275,000 when the market rate was above 5%

c. Issuance at a price of $430,000 when the market rate was below 5%

Requirements

1. Journalize Adam’s issuance of the bonds and first semiannual interest payment for each situation. Explanations are not required.

2. Which condition results in the most interest expense for Adam’s Machine Tool, Inc.? Explain in detail.