Mark IV Industries Inc. issued $100 million 13% debentures due March 15, 2022, with interest payable March 15 and September 15; the price was 96.5.
Requirements
Answer these questions:
1. Journalize Mark IV Industries Inc.'s issuance of these bonds on March 15, 2017. No explanation is required, but describe the transaction in detail, indicating who received cash, who paid cash, and how much.
2. Why is the stated interest rate on these bonds so high?
3. Compute the semi-annual cash interest payment on the bonds.
4. Compute the semi-annual interest expense under the straight-line amortization method.
5. Compute both the first-year (from March 15, 2017, to March 15, 2018) and the second year interest expense (March 15, 2018, to March 15, 2019) under the effective-interest amortization method. The market rate of interest at the date of issuance was 14%. Why is interest expense greater in the second year?