Question
On July 1, 2012, Dacotah Chemical Company issued $4,000,000 face value,10%,IO-year bonds at $4,543,627. This price resulted in an 8% effective-interest rate on the bonds.
On July 1, 2012, Dacotah Chemical Company issued $4,000,000 face value,10%,IO-year bonds at $4,543,627. This price resulted in an 8% effective-interest rate on the bonds. Dacotah uses the effective-interest method to amortize bond premium or discount. The bonds pay semi-annual interest on each July 1 and January 1.
(Round all computations to the nearest dollar.)
(a) Prepare the journal entries to record the following transactions.
1. The issuance of the bonds on July 1, 2012.
2. The accrual of interest and the amortization of the premium on December31, 2012.
3. The payment of interest and the amortization of the premium on July1,2013, assuming no accrual of interest on June 30.
4. The accrual of interest and the amortization of the premium on December31, 2013.
(b) Show the proper balance sheet presentation for the liability for bonds payable on December31, 2013,balance sheet.
(c)Provide the answers to the following questions in letterform.
1. What amount of interest expense is reported for 2013?
2. Would the bond interest expense reported in 2013 be the same as, greater than,or less than the amount that would be reported if the straight-line method of amortization were used?
3. Determine the total cost of borrowing over the life of the bond.
4. Would the total bond interest expense be greater than,the same as, or less than the total interest expense if the straight-line method of amortization were used?
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