Paris Products Ltd. issued $3 million of 5%, 5-year bonds on January 1, 2021. The bonds were dated January 1 and pay interest annually. There is no collateral secured against the bonds and Paris Products may buy back the bonds at any time. The market interest rate was 6% for these bonds. Paris has a calendar year end.

Instructions

a. Describe the features of these bonds.

b. Calculate the price of the bonds and record the bond issue.

c. Prepare an effective-interest amortization table for these bonds. Round amounts to the nearest dollar.

d. Record any required adjusting entries and subsequent payment for the first three interest payments assuming reversing entries have not been used.

Taking It Further

Explain the difference between a contractual interest rate and market interest rate. Explain why one rate changes over the term of the bonds and the other stays the same.