Waxman Corporation has $2,000,000 of 9.5 percent, 25-year bonds dated March 1, 2011, with interest payable on February 28 and August 31. The company’s fiscal year-end is February 28. It uses the effective interest method to amortize bond premiums or discounts.

REQUIRED

1. Assume the bonds are issued at 102.5 on March 1, 2011, to yield an effective interest rate of 9.2 percent. Prepare journal entries for March 1, 2011; August 31, 2011; and February 28, 2012.

2. Assume the bonds are issued at 97.5 on March 1, 2011, to yield an effective interest rate of 9.8 percent. Prepare journal entries for March 1, 2011; August 31, 2011; and February 28, 2012.

3. Explain the role that market interest rates play in causing a premium in requirement 1 and a discount in requirement 2.