During 2013 and 2014, Davis Corp. completed the following transactions relating to its bond issue. The corporation's fiscal year is the calendar year.
2013:
Jan. 1 Issued $200,000 of ten-year, 6 percent bonds for $197,000. The annual cash payment for interest is due on December 31.
Dec. 31 Recognized interest expense, including the amortization of the discount, and made the cash payment for interest. Dec. 31 Closed the interest expense account.
2014:
Dec. 31 Recognized interest expense, including the amortization of the discount, and made the cash payment for interest. Dec. 31 Closed the interest expense account.
Required:
a. When the bonds were issued, was the market rate of interest more or less than the stated rate of interest? If Davis had sold the bonds at their face amount, what amount of cash would Davis have received?
b. Prepare the general journal entries for these transactions.
c. Prepare the liabilities section of the balance sheet at December 31, 2013 and 2014.
d. Determine the amount of interest expense that will be reported on the income statements for 2013 and 2014.
e. Determine the amount of interest that will be paid in cash to the bondholders in 2013 and 2014.