On January 1, 2014, Murphy Company issued $1,600,000 face value, 7%, 10-year bonds at $1,717,761. This price resulted in a 6% effective-interest rate on the bonds. Murphy uses the effective-interest method to amortize bond premium or discount.

The bonds pay annual interest on each January 1.

Instructions

(a) Prepare the journal entries to record the following transactions.

(1) The issuance of the bonds on January 1, 2014.

(2) Accrual of interest and amortization of the premium on December 31, 2014.

(3) The payment of interest on January 1, 2015.

(4) Accrual of interest and amortization of the premium on December 31, 2015.

(b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2015, balance sheet.

(c) Provide the answers to the following questions in narrative form.

(1) What amount of interest expense is reported for 2015?

(2) Would the bond interest expense reported in 2015 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used?

AppendixLO2