On July 1, 2006, Brushy Mountain Communications Equipment Inc. issued $10,000,000 of 10-year, 9% bonds when the market rate of interest was 12%. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Instructions

1. Calculate the selling price of the bond issue and the bond discount or premium on the issue date. Use the present value tables in Appendix A.

2. Record the entry for the amount of the cash proceeds from the sale of the bonds.

3. Record the entries for the following:

a. The first semiannual interest payment on December 31, 2006, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.)

b. The interest payment on June 30, 2007, and the amortization of the bond discount, using the straight-line method.

4. Determine the total interest expense for 2006.

5. Will the bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest? Explain.