Assume that on April 1, 2014, Roland, Corp. issues 8%, 10-year bonds payable with a maturity value of $400,000. The bonds pay interest on March 31 and September 30. Roland’s fiscal year-end is December 31.

Requirements

1. If the market interest rate is 7 1/2% when Roland, Corp. issues its bonds, will the bonds be priced at par, at a premium, or at a discount? Explain.

2. If the market interest rate is 9% when Roland, Corp. issues its bonds, will the bonds be priced at par, at a premium, or at a discount? Explain.

3. Assume that the issue price of the bonds is $404,000. Journalize the following bonds payable transactions, first using the straight-line method and second using the effective interest method (Note: you will need a financial calculator to calculate the market rate for the effective interest method):

a. Issuance of the bonds on April 1, 2014.

b. Payment of interest and amortization of premium on September 30, 2014.

c. Accrual of interest and amortization of premium on December 31, 2014.

d. Payment of interest and amortization of premium on March 31, 2015.