Question: Lake Company obtained authorization to issue 10-year bonds with a face value of $5 million. The bonds are dated June 1, 2011, and have a

Lake Company obtained authorization to issue 10-year bonds with a face value of $5 million. The bonds are dated June 1, 2011, and have a contract rate of interest of 6 percent. They pay interest on December 1 and June 1. The bonds are issued on September 1, 2011, at 100 plus three months’ accrued interest.

Instructions

Prepare the necessary journal entries in general journal form on:

a. September 1, 2011, to record the issuance of the bonds.

b. December 1, 2011, to record the first semiannual interest payment on the bond issue.

c. December 31, 2011, to record interest expense accrued through year-end.

d. June 1, 2012, to record the second semiannual interest payment.

e. What was the prevailing market rate of interest on the date that the bonds were issued?

Explain.

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