Legacy issues $325,000 of 5%, four-year bonds dated January 1, 2018, that pay interest semiannually on June 30 and December 31. They are issued at $292,181, and their market rate is 8% at the issue date.

Required

1. Prepare the January 1, 2018, journal entry to record the bonds’ issuance.

2. Determine the total bond interest expense to be recognized over the bonds’ life.

3. Prepare a straight-line amortization table like the one in Exhibit 10.7 for the bonds’ first two years.

4. Prepare the journal entries to record the first two interest payments.

5. Assume the market rate on January 1, 2018, is 4% instead of 8%. Without providing numbers, describe how this change affects the amounts reported on Legacy’s financial statements.

Transcribed Image Text:

Exhibit 10.7 Straight-Line Amortization of Bond Discount Semlannual Unamortized Carrying Value Perlod-End Discount (0) 12/31/2018... $3,600 $ 96,400 6/30/2019... (1) (2) 12/31/2019 2,700 97,300 1,800 98,200 (3) 6/30/2020. 900 99,100 (4) 12/31/2020.. 100,000 The columns always sum to par value for discount bonds. Total bond discount of $3,600 less accumulated periodic amortization of $900 per semionnual interest period. *Bond par value of $100,000 kss unamortized discount.