When Parisian Globe issued $4,000,000 of ten-year, 11 percent bonds on September 1, 2009, the market interest rate was 9 percent. The bonds pay interest semiannually on March 1 and September 1. Parisian Globe has a calendar year-end and amortizes bond discounts or premiums using the straight-line method.
(a) Determine the present value (or issue price) of these bonds.
(b) Prepare the journal entries related to the bonds on the following dates:
(1) September 1, 2009
(2) December 31, 2009
(3) March 1, 2010
(4) September 1, 2010
(c) What is the carrying value of the bonds as of September 2, 2010?
(d) Gary Schorg had originally purchased $1,200,000 of the Parisian Globe bonds on September 1, 2009. Use present value calculations to determine what Schorg paid for his portion of the bonds. If Schorg sells his bonds to Lilly Puchiane on February 16, 2013, what journal entry will Parisian Globe make at that time? Explain your answer.
(e) Assume the market rate of interest at the date of issue had been 14 percent. What would the bond-selling price have been?