Question: Klamath Manufacturing sold 20 year bonds with a total face amount

Klamath Manufacturing sold 20-year bonds with a total face amount of $1,000,000 and a stated rate of 7.5 percent. The bonds sold for $1,080,000 on December 31, 2011, and pay interest semiannually on June 30 and December 31.

1. Prepare the entry to recognize the sale of the bonds.
2. Determine the amount of the semiannual interest payment required by the bonds.
3. Prepare the journal entry made by Klamath at June 30, 2012, to recognize the interest expense and an interest payment.
4. Determine the amount of interest expense for 2012.
5. If Klamath issued bonds with a variable interest rate, would you expect the rate to increase, decrease, or stay the same? Why?
6. What should Klamath consider in deciding whether to use a fixed or variable rate?

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