Question
On September 1, 2011, Bella Company issued $5 million in 10-year, 12 percent bonds payable. Interest is payable semiannually on March 1 and September 1.
On September 1, 2011, Bella Company issued $5 million in 10-year, 12 percent bonds payable. Interest is payable semiannually on March 1 and September 1. Bond discounts and premiums are amortized at each interest payment date and at year-end. The companys fiscal year ends at December 31. Instructions:
a. Make the necessary adjusting entries at December 31, 2011, and the journal entry to record the payment of bond interest on March 1, 2012, under each of the following assumptions: 1. The bonds were issued at 98. (Round to the nearest dollar.) 2. The bonds were issued at 104. (Round to the nearest dollar.) (Explain each calculation step by step )
b. Compute the net bond liability at December 31, 2012, under assumptions 1 and 2 above. (Round to the nearest dollar.)
c. Under which of the above assumptions, 1 or 2, would the investors effective rate of interest be higher?
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