On September 1, 2015, Evansville Lumber Company issued $80 million in 20-year, 10 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, 2015, and the journal entry to record the payment of bond interest on March 1, 2016, under each of the following assumptions:

1. The bonds were issued at par.

b. Compute the net bond liability at December 31, 2016, under assumptions 1, 2(The bonds were issued at 98.) and 3(The bonds were issued at 101.) stated above. Round to the nearest dollar. (For this question, you need to first figure out how much of the bond discount/premium is amortized, and how much of it is remaining.)

c. Under the above assumptions 1, 2 and 3, is the contract rate higher than/lower than/equal to the market rate of interest (also known as investors effective rate of interest) respectively?

A. Equal, lower, higher

B. Equal, higher, lower

C. Higher, lower, equal

D. Higher, higher, equal

d. Under the above assumptions 1, 2 and 3, how does the carrying value of the bond change over time?

A. Decrease, decrease, decrease

B. Constant, constant, constant

C. Constant, decrease, increase

D. Constant, increase, decrease