On September 1, 2007, Park Rapids Lumber Company issued \(\$ 80\) million in 20 -year, 10 percent bonds payable. Interest is payable semiannually on March 1 and September 1. Bond discounts and premiums are amortized at each interest payment date and at year-end. The company's fiscal year ends at December 31.

Instructions

a. Make the necessary adjusting entries at December 31,2007 , and the journal entry to record the payment of bond interest on March 1, 2008, under each of the following assumptions:

1. The bonds were issued at 98 . (Round to the nearest dollar.)

2. The bonds were issued at 101 . (Round to the nearest dollar.)

b. Compute the net bond liability at December 31, 2008, under assumptions \(\mathbf{1}\) and 2 above. (Round to the nearest dollar.)

c. Under which of the above assumptions, \(\mathbf{1}\) or \(\mathbf{2}\), would the investor's effective rate of interest be higher? Explain.