$7$ AP$9-8$ Recording Bond Issuance and Interest Payment with Explanation of Bond Premium and Discussion of Management Strategy $($P$9-11)$

On March $1,$ year $1,$ Carter Corporation issued $$15,000,000$ in bonds that mature in $10$ years. The bonds have a coupon rate of $6\mathrm{.}3$ percent and pay interest on March $1$ and September $1.$ When the bonds were sold, the market rate of interest was $6$ percent. Carter uses the effective$-$interest method to amortize bond discount or premium. By December $31,$ year $1,$ the market interest rate had increased to $7$ percent.

Required:

Record the issuance of the bond on March $1,$ year $1.$

Compute the present value of the difference between the interest paid each six months $($$$472,500)$ and the interest demanded by the market $($ $$15$ million $6\%\frac{6}{12}=$$$450,000.$ Use the market rate of interest and the $10-$year life of the bond in your present value computation. What does this amount represent? Explain.

Record the payment of interest on September $1,$ year $1.$

Record the adjusting entry for accrued interest on December $31,$ year $1.$

Why does interest expense change each year when the effective$-$interest method is used?