Rago Corporation issued bonds twice during 2010. A summary of the transactions involving the bonds follows.

2010

Jan. 1 Issued $3,000,000 of 9.9 percent, ten-year bonds dated January 1, 2010, with interest payable on June 30 and December 31. The bonds were sold at 102.6, resulting in an effective interest rate of 9.4 percent.

Mar. 1 Issued $2,000,000 of 9.2 percent, ten-year bonds dated March 1, 2010, with interest payable March 1 and September 1. The bonds were sold at 98.2, resulting in an effective interest rate of 9.5 percent. June 30 Paid semiannual interest on the January 1 issue and amortized the premium, using the effective interest method.

Sept. 1 Paid semiannual interest on the March 1 issue and amortized the discount, using the effective interest method.

Dec. 31 Paid semiannual interest on the January 1 issue and amortized the premium, using the effective interest method.

31 Made an end-of-year adjusting entry to accrue interest on the March 1 issue and to amortize two-thirds of the discount applicable to the second interest period.

2011

Mar. 1 Paid semiannual interest on the March 1 issue and amortized the remainder of the discount applicable to the second interest period.

Required

1. Prepare entries in journal form to record the bond transactions. (Round amounts to the nearest dollar.)

2. Describe the effect on profitability and liquidity by answering the following questions.

a. What is the total interest expense in 2010 for each of the bond issues?

b. What is the total cash paid in 2010 for each of the bond issues?

c. What differences, if any, do you observe and how do you explain these differences?