Problem:
During 2008 and 2009, Jamie Co. completed the following transactions relating to its bond issue. The company's fiscal year ends on December 31.
2008
Mar. 1: Issued $ 100,000 of eight-year, 7 percent bonds for $96,000. The semiannual cash payment for interest is due on March 1 and September 1, beginning September 2008.
Sept.1: Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.
Dec. 31: Recognized accrued interet expense including the amortization of the discount.
Dec. 31: Closed the interest expense account
2009
Mar. 1: Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.
Sept. 1: Recognized interest expense including the amortization of the discount and made the semiannual cash payment for interest.
Dec. 31: Recognized accrued interet expense including the amortization of the discount.
Dec. 31: Closed the interest expense account
REQUIRED:
Q1. When the bonds were issued, was the market rate of interest more or less than the stated rate of interest? If the bonds had sold at face value, what amount of cash would Jamie Co. have recieved?
Q2. Prepare the general journal entries for these transactions.
Q3. Prepare the liabilities section of the balance sheet at December 31, 2008 and 2009.
Q4. Determine the amount of interest Jamie Co would pay to the bond holders in 2008 and 2009.