Problem: Prepare entries to record issuance of bonds, payment of interest, and amortization of premium using effective interest method, answer questions
On July I, 2002, Imperial Oil Company issued $2,000,000 face value, 12%, 10-year bonds at $2,249,245. This price resulted in a 10% effective-interest rate on the bonds. Imperial Oil uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on each July I and January I.
Instructions:
(A) Prepare the journal entries to record the following transactions:
(1) The issuance of the bonds on July I, 2002.
(2) The accrual of interest and the amortization of the premium on December 31, 2002.
(3) The payment of interest and the amortization of premium on July I, 2003.
(4) The accrual of interest and the amortization of the premium on December 31, 2003.
(B) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2003 balance sheet date.
(C) Provide the answers to the following questions in letter form, addressed to the comptroller of Imperial Oil:
(1) What amount of interest expense is reported for 2003?
(2) Would the bond interest reported in 2003 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used?
(3) Determine the total cost of borrowing over the life of the bond.
(4) Would the total bond interest expense be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used?