On January 1, 2018, Thomas Company issued $100,000, 5-year, 12% bonds, with interest payable semi-annually, at an effective (market rate) of 10%. Use the present value factors from Exhibit 5 and 7 on pages 559 and 560, respectively from the textbook to calculate the price of the bonds at issuance.

Prepare the journal entries to record the following:

1. 1/1/2018 issuance of the bonds for cash

2. 6/30/2018 semi-annual interest payment assuming straight line amortization

3. 12/31/2018 semi-annual interest payment assuming straight line amortization

4. 1/1/2019 redemption of the bonds at a price of 115.

Please answer the following questions:

1. What was the total interest expense for the year 2018 reflected on the income statement?

2. What was the total amount borrowed?

3. Calculate the effective rate of interest for the year (Interest Expense/Total Amount Borrowed) and round to the nearest percent. Is this rate more indicative of the market rate or contract rate? Do you think the financial statements reflect the true cost of borrowing? Why?

4. Why would the company redeem the bonds prior to the maturity date if they were going to recognize a loss? Can you think of an example of such a decision we might face in our personal lives?

5. The 10-year German and Japanese government bonds have recently traded at a negative yield (market rate of interest)! Why would an investor purchase a bond that, in effect, pays a negative interest rate?!