Amortization of a Bond Discount and Premium

On September 1, 2011, Rodriguez Plumbing Company issued $5 million in 10-year, 12 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 companys fiscal year ends at December 31.

Instructions

a.Make the necessary adjusting entries at December 31, 2015, and the journal entry to record the payment of bond interest on March 1, 2016, under each of the following assumptions:

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

2. The bonds were issued at 104. (Round to the nearest dollar.)

b.Compute the net bond liability at December 31, 2016, under assumptions 1 and 2 above. (Round to the nearest dollar.)

c.Under which of the above assumptions, 1 or 2, would the investors effective rate of interest be higher? Explain

a.
General Journal
(1)		Bonds issued at 98:
2015
Dec	31	Bond Interest Expense
			Discount on Bonds Payable
			Bond Interest Payable
		To record accrual of bond interest expense for
		four months in 2015:
		Contract interest
		Discount amortization
		Bond interest expense for four months
2016
Mar	1	Bond Interest Payable
		Bond Interest Expense
			Discount on Bonds Payable
			Cash
		To record semiannual bond interest payment and
		interest expense for two months (1/2 of interest for
		four months, as computed in preceding entry). *
(2)		Bonds issued at 104:
2015
Dec	31	Bonds Interest Expense
		Premium on Bonds Payable
			Bond Interest Payable
		Accrual of interest on bonds for four months:
		Contract interest
		Less: Premium amortization
		Bond interest expense for four months
2016
Mar	1	Bond Interest Payable
		Bond Interest Expense
		Premium on Bonds Payable
			Cash
		Semiannual bond interest payment and interest
		expense for two months (1/2 of interest for four
		months, as computed in preceding entry).*
		* Actual amount differs slightly due to rounding adjustment.