Problem 1 Bonds (16 Points)

The XYZ Company is proposing a bond offering placement to raise capital. The bond debenture states the following:

Company: XYZ Company

Date of bonds: January 1, 2016

Term: 2 years

Face (Par) Value: $100,000

Stated interest rate: 10%

Interest payments: Quarterly (January 1, April 1, July 1, October 1)

The market required an effective yield of 20% for the placement to be issued.

Please make calculations to answer the following questions:

1) Did the market consider XYZ Company a greater risk or less of a risk than the original placement? (2)

2) Will this bond sell at a premium or a discount? Why? (2)

3) Journalize the entry to record the issuance of the bonds on January 1, 2016. (3)

4) How much is interest expense for the first quarter if the straight-line method of amortization is used? (3)

5) How much is interest expense for the first quarter if the effective interest method of amortization is used. (3)

6) Journalize the entry to record the interest payment for the first quarter on April 1, 2016. (3)