Problem 10.6A (Static) Amortization of a Bond Discount and Premium (LO10-5, LO10-6)

On September 1, 2021, 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 company's fiscal year ends at December 31.

Required: a-1. Prepare the necessary adjusting entries at December 31, 2021, and the journal entry to record the payment of bond interest on March 1, 2022, under the assumption that the bonds were issued at 98.

a-2. Prepare the necessary adjusting entries at December 31, 2021, and the journal entry to record the payment of bond interest on March 1, 2022, under the assumption that the bonds were issued at 101.

b. Compute the net bond liability at December 31, 2022, under assumptions a-1 and a-2 above.

c. Under which of the following assumptions would the investor's effective rate of interest be higher?

1. The bonds were issued at 98.

2. The bonds were issued at 101.