On July 1, 2011, S. Posadas Chemical Company issued $3,000,000 face value, 10%, 10-year bonds at $3,407,720.

Question:

On July 1, 2011, S. Posadas Chemical Company issued $3,000,000 face value, 10%, 10-year bonds at $3,407,720. This price resulted in an 8% effective-interest rate on the bonds.
Posadas uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on each July 1 and January 1.

Instructions
(a) Prepare the journal entries to record the following transactions.
(1) The issuance of the bonds on July 1, 2011.
(2) The accrual of interest and the amortization of the premium on December 31, 2011.
(3) The payment of interest and the amortization of the premium on July 1, 2012, assuming no accrual of interest on June 30.
(4) The accrual of interest and the amortization of the premium on December 31, 2012.
(b) Show the proper presentation for the liability for bonds payable on the December 31, 2012, Provide the answers to the following questions in letter form.
(1) What amount of interest expense is reported for 2012?
(2) Would the bond interest expense reported in 2012 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used?
(3) Determine the total cost of borrowing over the life of the bond.
(4) Would the total bond interest expense be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used?

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...