Mitchell Inc. produces and sells voltage regulators. On July 1, 2006, Mitchell Inc. issued $14,000,000 of 10-year, 11% bonds priced to yield an effective interest rate of 10%. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Instructions

1. Calculate the selling price of the bonds and the amount of bond premium or discount upon issuance. Use the present value tables in Appendix A.

2. Record the entry for the amount of the cash proceeds from the sale of the bonds.

3. Record the entries for the following:

a. The first semiannual interest payment on December 31, 2006, including the amortization of the bond premium, using the straight-line method.

b. The interest payment on June 30, 2007, and the amortization of the bond premium, using the straight-line method.

4. Determine the total interest expense for 2006.

5. Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest? Explain.