Response to the following problem:
On January 1, 2015, Pete's Planes Inc. was authorized to issue 5-year, $500,000, 12% bonds. Interest was payable on June 30 and December 31. All the bonds were issued on January 1, 2015.
Required: Answer the questions for each of these independent cases.
Case A: the bonds were issued when the market rate of interest was 12%.
Case B: the bonds were issued when the market rate of interest was 16%
Case C: the bonds were issued when the market rate of interest was 8%
1. Calculate
a. the amount of each semi-annual cash interest payment on the issued bonds;
b. the issue price of the bonds, consisting of the present value of the bond face value and the present value of the 10 semi-annual interest payments to be made during the 5-year period (for convenience, round all calculations to the nearest dollar);
c. the amount of amortization applicable to each interest payment date up to and including December 31, 2017; and
d. the carrying amount of the bonds at December 31, 2017.
2. Prepare journal entries to record the 2017 transactions.