Problem:
On July 1, 2006 S.Strigel Chemical Co. issued a $5,000,000 face value, 10%, 10 yr bonds at $5,679,533. This price resulted in an 8% effective interest rate on the bonds. Strigel uses the effective interest method to amortize bond premium or discount. The bonds pay semiannual interest on each July 1 and January 1.
Instructions: please round all computations to the nearest dollar.
a. Prepare the journal entries to record the following transactions.
1. the issuance of the bonds on July 1, 2006.
2. The accrual of interest and the amortization of the premium on dec. 31, 2006
3. The payment of interest and the amortization of the premium on July 1, 2007, assuming no accrual of interest on June 30. (I believe this is $23,731)
4. The accrual of interest and the amortization of the premium on Dec. 31, 2007. (I believe this is $24,681)
b. Show the proper balance sheet presentation for the liability for bonds payable on Dec. 31, 2007, balance sheet. (I believe this is $5,608,302)
c. Provide the answers to the following questions in letter form.
1. What amount of interest expense is reported in 2007?
2. Would the bond interest expense reported in 2007 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?