Question

On February 28, 2014, Starr Corp. issues 4%, fve-year bonds payable with a face value of $1,200,000. The bonds pay interest on February 28 and August 31. Starr Corp. amortizes bond discount by the straight-line method.

Requirements
1. If the market interest rate is 3% when Starr 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 5% when Starr 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 94. Journalize the following bond transactions.
a. Issuance of the bonds on February 28, 2014
b. Payment of interest and amortization of the bond discount on August 31, 2014
c. Accrual of interest and amortization of the bond discount on December 31, 2014, the year-end
d. Payment of interest and amortization of the bond discount on February 28, 2015
4. Report interest payable and bonds payable as they would appear on the Starr Corp. balance sheet at December 31, 2014.



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  • CreatedJuly 25, 2014
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