The following transactions were completed by Douthett Inc., whose fiscal year is the calendar year:

2006

July 1 Issued $25,000,000 of five-year, 8% callable bonds dated July 1, 2006, at an effective rate of 10%. Interest is payable semiannually on December 31 and June 30.

Dec. 31 Paid the semiannual interest on the bonds.

31 Recorded bond discount amortization, which was determined by using the straight-line method.

2007

June 30 Paid the semiannual interest on the bonds. (Amortization of discount or premium is to be recorded annually.)

Dec. 31 Paid the semiannual interest on the bonds.

31 Recorded bond discount amortization, which was determined by using the straight-line method.

2008

June 30 Recorded the redemption of the bonds, which were called at 98½.

The balance in the bond discount account is $1,158,306 after payment of interest and amortization of discount have been recorded. (Record the redemption only.)

Instructions

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

2. Record the entries for the foregoing transactions.

3. Indicate the amount of the interest expense in (a) 2006 and (b) 2007.

4. Determine the carrying amount of the bonds as of December 31, 2007.