In the following two independent cases, the company closes its books on December 31:
1. Munchousen Inc. sells $2 million of 10% bonds on March 1, 2011. The bonds pay interest on September 1 and March 1. The bonds’ due date is September 1, 2014. The bonds yield 12%.
2. Ducharme Ltd. sells $6 million of 11% bonds on June 1, 2011. The bonds pay interest on December 1 and June 1. The bonds’ due date is June 1, 2015. The bonds yield 10%. On October 1, 2012, Ducharme buys back $1.2 million worth of bonds for $1.4 million (includes accrued interest).
Instructions
For the two cases above, prepare all of the relevant journal entries from the time of sale until the date indicated (for situation 1, prepare the journal entries through December 31, 2012; for situation 2, prepare the journal entries through December 1, 2013). Use the effective interest method for discount and premium amortization (prepare any necessary amortization tables). Amortize any premium or discount on the interest dates and at year end. (Assume that no reversing entries were made.)