Valdez issues $450,000 of 13%, four-year bonds dated January 1, 2021, that pay interest semiannually on June 30 and December 31. They are issued at $493,608 when the market rate is 10%.

Required

1. Prepare the January 1 journal entry to record the bonds’ issuance.
2. Determine the total bond interest expense to be recognized over the bonds’ life.
3. Prepare an effective interest amortization table like the one in Exhibit 14B.2 for the bonds’ first two years.
4. Prepare the journal entries to record the first two interest payments.

Analysis Component

5. Assume that the market rate at issuance is 14% instead of 10%. Without presenting numbers, describe how this change affects the amounts reported on Valdez’s financial statements.

Exhibit 14B.2

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EXHIBIT 14B.2 Bonds: $100,000 Par Value, Semiannual Interest Payments, Two-Year Life, 6% Semiannual Contract Rate, 4.9851% Semiannual Market Rate Effective Interest Amortization of Bond (A) (B) (C) (D) (E) Premium Cash Bond Semiannual Interest Interest Premium Unamortized Carrying $103,600 Interest Paid Expense Amortization Premium Value S102,765 Period-End 6% x $100,000 4.9851% x Prior (E) (A) – (B) Prior (D) - (C) $100,000 + (D) $101,888. --- $100,967 (0) 12/31/2021 $3,600 $103,600 (1) 6/30/2022 $ 6,000 $ 5,165 $ 835 2,765 102,765 $100.000 Carrying value------ (2) 12/31/2022 6,000 5,123 877 1,888 101,888 (3) 6/30/2023 6,000 5,079 921 967 100,967 12/31/21 12/31/2023 (4) 6,000 5,033 967 100,000 $24,000 $20,400 $3,600 Bonds Payable | 12/31/2021 100,000 6/30/2022 Column (A) is the par value ($100,000) multiplied by the semiannual contract rate (6%). Column (B) is the prior period's carrying value multiplied by the semiannual market rate (4.9851%). Column (C) is the difference between interest paid and bond interest expense, or [(A) – (B)]. 12/31/2022 6/30/2023 12/31/2023 100,000 Column (D) is the prior period's unamortized premium less the current period's premium amortization. | 12/31/2023 Column (E) is the par value plus unamortized premium, or [$100,000+ (D)]. 6/30/22 12/31/22 6/30/23 12/31/23