Problem:
On June 1, 2013, Rockies Bottling Company sold $2,000,000 in long-term bonds. The bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective-interest method.
Required:
Question 1: Prepare a bond amortization table for this problem to indicate the amount of interest expense and discount or premium amortization at each May 31. Include only the first four years.
Question 2: Calculate the initial carrying value of the bonds.
Question 3: Assuming that interest and amortization of (discount or premium) are recorded each May 31, prepare the adjusting entry to be made on December 31, 2015.
Note: Be sure to show how you arrived at your answer.