On April 1, 2014, Pettington Corp. issues 7-percent, 10-year bonds payable with a maturity value of $3,000,000. The bonds pay interest on March 31 and September 30, and Pettington Corp. amortizes premium and discount by the straight-line method.

Required

1. If the market interest rate is 6 percent when Pettington Corp. issues its bonds, will the bonds be priced at par, at a premium, or at a discount? Explain.

2. If the market interest rate is 8 percent when Pettington Corp. issues its bonds, will the bonds be priced at par, at a premium, or at a discount? Explain.

3. Assume the issue price of the bonds is 103.00. Journalize the following bonds payable transactions:

a. Issuance of the bonds on April 1, 2014.

b. Payment of interest and amortization of premium on September 30, 2014.

c. Accrual of interest and amortization of premium on December 31, 2014, the year end.

d. Payment of interest and amortization of premium on March 31, 2015.

4. Report interest payable and bonds payable as they would appear on the Pettington Corp. balance sheet at December 31, 2014.