The following selected information is from Universal Corporation's balance sheet:

UNIVERSAL CORPORATION

Balance Sheet (partial)

December 31, 2013

Current liabilities

Interest payable.......................................$ 18,000

Non-current liabilities

Bonds payable, due January 1, 2015.............1,200,000

Interest is payable semi-annually on January 1 and July 1. The bonds were issued at par.

Instructions

(a) What is the contractual rate of interest on the bonds?

(b) Record the payment of the bond interest on January 1, 2014.

(c) Assume that on January 1, 2014, after paying interest, Universal Corporation redeems $400,000 of the bonds at 98. Record the redemption of the bonds.

(d) Record the payment of the bond interest on July 1, 2014, on the remaining bonds.

(e) Prepare the adjusting entry on December 31, 2014, to accrue the interest on the remaining bonds.

(f) Prepare the entry to record the repayment of the remaining bonds on January 1, 2015.

Taking It Further

Was the market rate of interest higher or lower than the contractual rate of interest on January 1, 2014, when the bonds were redeemed? Explain.