Question: On January 1, 2018, Entity A issued 8% bonds dated January 1, 2018, with a face amount of $10 million. The bonds mature in 2022

On January 1, 2018, Entity A issued 8% bonds dated January 1, 2018, with a face amount of $10 million. The bonds mature in 2022 (5 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.

A. What was the issue price of the bonds?

B. Prepare the journal entry to record the bond issuance.

C. Prepare the journal entry to record interest on June 30, 2018, using the straight-line method.

D. Prepare the journal entry to record interest on December 31, 2018, assuming that Entity A had used the effective interest method from the inception. Prepare an amortization schedule.

E. Prepare a partial balance sheet showing the bonds at December 31, assuming that Entity A had used the effective interest method from the inception.

F. Why might a company utilize the straight-line method to amortize premium or discount? When is it permissible to do so?

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