Lake Company obtained authorization to issue 10 -year bonds with a face value of \(\$ 5\) million. The bonds are dated June 1,2007, and have a contract rate of interest of 6 percent. They pay interest on December 1 and June 1. The bonds are issued on September 1, 2007, at 100 plus three months' accrued interest.

Instructions

Prepare the necessary journal entries in general journal form on:

a. September 1,2007 , to record the issuance of the bonds.

b. December 1,2007 , to record the first semiannual interest payment on the bond issue.

c. December 31,2007 , to record interest expense accrued through year-end.

d. June 1,2008 , to record the second semiannual interest payment.

e. What was the prevailing market rate of interest on the date that the bonds were issued? Explain.