On January 2, 2013, the Tenenhouse Financial Corporation sold a large issue of Series A $1,000 denomination bonds. The bonds had a stated coupon rate of 6% (annual), had a term to maturity of four years, and made annual coupon payments (on December 31). Market conditions at the time were such that the bonds were sold at their face value.

During the ensuing two years, market interest rates fluctuated widely, and by January 2, 2015, the Tenenhouse bonds were trading at a price that provided an annual yield of 10%. (Note: The yield is the return from the investment. A bond priced at its present value generates a yield equal to the market rate, as the present value of the bond is calculated using the market rate; this implies that the market rate is 10%). Tenenhouses management was considering purchasing the Series A bonds in the open market and retiring them; the necessary capital was to be raised by a new bond issuethe Series B bonds. Series B bonds were to be $1,000 denomination coupon bonds with a stated coupon rate of 8% (annual), making annual coupon payments (on December 31), and a three year term. Management felt that these bonds could be sold at a price yielding no more than 10%, especially if the Series A bonds were retired.

Tenenhouse amortizes the bonds using the effective-interest rate method.

Required:

Show the journal entries necessary to record the following transactions:

a. Purchase and retirement of one Series A bond on January 2, 2015.

b. Issue of one Series B bond on January 2, 2015 (yield was 10%).

c. The first coupon payment on a Series B bond on December 31, 2015.