Eraser Equipment Company Inc. issued $400,000 of 9% bonds maturing in six years. The bonds pay interest semi-annually and are issued to yield 8%.
Required:
a. Calculate the issuance price of the bonds and give the journal entry to record the issuance.
b. Give the journal entries to record the first two interest payments.
c. Calculate the carrying value of the bonds one year after issuance (that is, at the beginning of the second year).
d. Calculate the market value of the bonds one year after issuance, if the market yield has increased to 10%.
e. Compare the carrying value (calculated in part "c") and the market value of the bonds (calculated in part "d") one year after issuance, and explain why a difference exists.
f. Assuming the company retires the bonds at the beginning of the second year by purchasing them in the open market, give the journal entry to record this. (Hint: The amount that you calculated in part "d" should be used in this entry.)