Response to the following problem:
Cathy's Copper Products Inc. was authorized to issue $1,000,000 of face value bonds.
Date of authorization January 1, 2017
Term 3 years
Interest rate 12%
Interest payment dates Semi-annually on June 30 and December 31
The following transactions occurred during 2017.
Jan. 1 Issued $100,000 of bonds
Jun. 30 Paid the semi-annual interest on the issued bonds and made an entry to record straight-line amortization
Dec. 31 Paid the semi-annual interest on the issued bonds and made an entry to record amortization.
Required: Answer the questions for each of these 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 interest payment on the issued bonds;
b. the present value of the bonds; and
c. the amount of amortization applicable to each interest payment date (use the effective interest method of amortization.
2. Prepare journal entries to record the 2017 transactions.