Assume that on February 1, 2018, Sierra Corp. issues 7 percent, 10-year bonds payable with a maturity value of $500,000. The bonds pay interest on January 31 and July 31, and Sierra amortizes any premium or discount using the straight-line method. Sierra’s fiscal year end is December 31.

Requirements

1. If the market interest rate is 6.5 percent when Sierra 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 Sierra Corp. issues its bonds, will the bonds be priced at par, at a premium, or at a discount? Explain.

3. Assume that the issue price of the bonds is $525,000. Journalize the following bonds payable transactions (round amounts to the nearest dollar):

a. Issuance of the bonds on February 1, 2018

b. Payment of interest and amortization of premium on July 31, 2018

c. Accrual of interest and amortization of premium on December 31, 2018

d. Payment of interest and amortization of premium on January 31, 2019