On September 1, 2011, Park Rapids Lumber Company issued $80 million in 20-year, 10 percent bonds payable. Interest is payable semiannually on March 1 and September 1. Bond discounts and premiums are amortized at each interest payment date and at year-end. The company’s fiscal year ends at December 31.
Instructions
a. Make the necessary adjusting entries at December 31, 2011, and the journal entry to record the payment of bond interest on March 1, 2012, under each of the following assumptions:
1. The bonds were issued at 98. (Round to the nearest dollar.)
2. The bonds were issued at 101. (Round to the nearest dollar.)
b. Compute the net bond liability at December 31, 2012, under assumptions 1 and 2 above. (Round to the nearest dollar.)
c. Under which of the above assumptions, 1 or 2, would the investor’s effective rate of interest be higher? Explain.