Gravity Inc. issued $10,000,000 of 7 percent, 20-year bonds at a premium. The bonds are retired prior to maturity at 102. The book value of the bonds is $10,453,000 at this time. Gravity Inc. amortizes bond premiums using the effective-interest method.

Required

1. Was the contract rate on the bonds at the time of issuance greater or less than the market rate of interest? Explain.

2. Prepare the journal entry to record the retirement of the bonds on May 6.

3. Assume that the bonds were redeemed at maturity. Would the total cash interest paid be different if the company used the straight-line method of amortization of premiums? Explain.