On June 30, 2014, Mosca Limited issued $4 million of 20-year, 13% bonds for $4,300,920, which provides a yield of 12%. The company uses the effective interest method to amortize any bond premium or discount. The bonds pay semi-annual interest on June 30 and December 31.
Instructions
(a) Prepare the journal entries to record the following transactions:
1. The issuance of the bonds on June 30, 2014
2. The payment of interest and the amortization of the premium on December 31, 2014
3. The payment of interest and the amortization of the premium on June 30, 2015
4. The payment of interest and the amortization of the premium on December 31, 2015
(b) Show the proper statement of financial position presentation for the liability for bonds payable on the December 31, 2014 statement of financial position.
(c) Answer the following questions.
1. What amount of interest expense is reported for 2014?
2. Will the bond interest expense that is reported in 2014 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used?
3. What is the total cost of borrowing over the life of the bond?
4. Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used?