Response to the following problem:
McFad issues $90,000 of 11%, three-year bonds dated January 1, 2011, that pay interest semiannually on June 30 and December 31. They are issued at $92,283. Their market rate is 10% at the issue date.
Required:
1. Prepare the January 1, 2011, journal entry to record the bonds' issuance.
2. Determine the total bond interest expense to be recognized over the bonds' life.
3. Prepare an effective interest amortization table for the bonds' first two years.
4. Prepare the journal entries to record the first two interest payments.
5. Prepare the journal entry to record the bonds' retirement on January 1, 2013, at 98.
Analysis Component
6. Assume that the market rate on January 1, 2011, is 12% instead of 10%. Without presenting numbers, describe how this change affects the amounts reported on McFad's financial statements.