Company Z is growing rapidly and needs additional capital to finance an expansion of its production capacity. During 2015, the Board of Directors and management decide to issue $4,000,000 of 2.5%, 20 year bonds with interest paid semi-annually. The bonds were issued at an effective interest rate of 3% with a covenant requiring the maintenance of a debt-to-asset ratio of 65%. Currently, their debt-to-asset ratio is 50%, based on $30M of assets, $3M of Current Liabilities and $12M of Long-term Liabilities

It is forecasted that net income will be $2,000,000 after income tax expense of $540,000 for 2016.

Required:

Prepare the journal entry for issuance of the bonds, assuming they were sold on January 2, 2016.Prepareanamortizationschedule(usingtheeffectiveinterestratemethod)forthefirst5yearsofthebond'slife.

• Explain the potential impact on the Balance Sheet, the Income Statement and the Statement of Cash Flows for the calendar year ending 12/31/16. include a description of the tax implications. Show your calculations, using the effective interest rate method.