On the first day of its fiscal year, Preston Company issued $5,000,000 of five-year, 8% bonds to finance its operations of producing and selling home improvement products. Interest is payable semiannually. The bonds were issued at an effective interest rate of 11%, resulting in Preston Company receiving cash of $4,434,676. The bond discount is amortized using the straight-line method.
a. Journalize the entries to record the following:
1. Sale of the bonds.
2. First semiannual interest payment and discount amortization.
3. Second semiannual interest payment and discount amortization.
b. Determine the amount of the bond interest expense for the first year.
c. Will the interest expense in the second year be greater than, less than, or equal to the interest expense in the first year?