Bond Transactions$-$Effective Interest Method

P$7.$ Krabna Corporation has $$8,000,000$ of $9\mathrm{.}5$ percent, $25-$year bonds dated March $1,$

$2014,$ with interest payable on February $28$ and August $31.$ The company's fiscal year

end is February $28.$ It uses the effective interest method to amortize bond premiums or

discounts. $($Round to the nearest dollar.$)$

REQUIRED

Assume the bonds are issued at $102\mathrm{.}5$ on March $1,2014,$ to yield an effective inter$-$

est rate of $9\mathrm{.}2$ percent. Prepare the journal entries for March $1,2014,$ August $31,$

$2014,$ and February $28,2015.$

Assume the bonds are issued at $97\mathrm{.}5$ on March $1,2014,$ to yield an effective interest

rate of $9\mathrm{.}8$ percent. Prepare the journal entries for March $1,2014,$ August $31,2014,$

and February $28,2015.$

ACCOUNTING CONNECTION $>$ Explain the role that market interest rates play in

causing a premium in requirement $l$ and a discount in requirement $2.$