On January 1, 2010, Drennen, Inc., issued $3 million face amount of 10-year, 14% stated rate bonds when market interest rates were 12%. The bonds pay semiannual interest each June 30 and December 31 and mature on December 31, 2019.
Required:
a. Using the present value tables in Chapter 6, calculate the proceeds (issue price) of Drennen, Inc.'s, bonds on January 1, 2010, assuming that the bonds were sold to provide a market rate of return to the investor.
b. Assume instead that the proceeds were $2,950,000. Use the horizontal model (or write the journal entry) to record the payment of semiannual interest and the related discount amortization on June 30, 2010, assuming that the discount of $50,000 is amortized on a straight-line basis.
c. If the discount in part b were amortized using the compound interest method, would interest expense for the year ended December 31, 2010, be more than, less than, or equal to the interest expense reported using the straight-line method of discount amortization? Explain.