Blue Mountain Power Company obtained authorization to issue 20-year bonds with a face value of $10 million. The bonds are dated May 1, 2011, and have a contract rate of interest of 10 percent. They pay interest on November 1 and May 1. The bonds were issued on August 1, 2011, at 100 plus three months’ accrued interest.

Instructions

Prepare the necessary journal entries in general journal form on:

a. August 1, 2011, to record the issuance of the bonds.

b. November 1, 2011, to record the first semiannual interest payment on the bond issue.

c. December 31, 2011, to record interest expense accrued through year-end. (Round to the nearest dollar.)

d. May 1, 2012, to record the second semiannual interest payment. (Round to the nearest dollar.)

e. What was the prevailing market rate of interest on the date that the bonds were issued? Explain.