On September 1, 2018, 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, 2018, and the journal entry to record

the payment of bond interest on March 1, 2019, under each of the following assumptions.

1. The bonds were issued at 98. (Round to the nearest dollar.)

2. The bonds were issued at 101. (Round to the nearest dollar.)

b. Compute the net bond liability at December 31, 2019, under assumptions 1 and 2. (Round to

the nearest dollar.)

c. Under which of these assumptions, 1 or 2, would the investors effective rate of interest be

higher? Explain.