The following is from Deshwar Corp.'s balance sheet:
DESHWAR CORP
Balance Sheet (partial)
December 31, 2013
Current liabilities
Interest payable..............................................$ 50,000
Non-current liabilities
Bonds payable, due January 1, 2017.....................2,500,000
Interest is payable semi-annually on January 1 and July 1. The bonds were issued at par.
Instructions
(a) What is the contractual rate of interest on the bonds?
(b) Record the payment of the bond interest on January 1, 2014.
(c) Assume that on January 1, 2014, aft er paying interest, Deshwar redeems $625,000 of the bonds at 102. Record the redemption of the bonds.
(d) Record the payment of the bond interest on July 1, 2014, on the remaining bonds.
(e) Prepare the adjusting entry on December 31, 2014, to accrue the interest on the remaining bonds.
(f) Prepare the entry to record the repayment of the remaining bonds on January 1, 2017.
Taking It Further
Was the market rate of interest higher or lower than the contractual rate of interest on
January 1, 2014, when the bonds were redeemed? Explain.