On March 1, 2020, Gill Management Ltd. issues 8.5 percent, 20-year bonds payable with a maturity value of $5,000,000. The bonds pay interest on February 28 and August 31. Gill Management Ltd. amortizes premiums and discounts by the straightline method.

Required

1. If the market interest rate is 7.5 percent when Gill Management 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 percent when Gill Management issues its bonds, will the bonds be priced at par, at a premium, or at a discount? Explain.

3. Assume the issue price of the bonds is 97.00. Journalize the following bond transactions:

a. Issuance of the bonds on March 1, 2020.

b. Payment of interest and amortization of the discount on August 31, 2020.

c. Accrual of interest and amortization of the discount on December 31, 2020, Gill Management’s year-end.

d. Payment of interest and amortization of the discount on February 28, 2021.

4. Report interest payable and bonds payable as they would appear on the Gill Management Ltd.’s balance sheet at December 31, 2020.