Problem: In order to purchase a competitor, ABC has decided to issue some bonds payable. The bonds carry the following terms: interest rate of 8%, interest payable semi-annually on January 1 and July 1. The bonds are callable at any time after July 2007 at 104. Due to the market rate of interest on similar issuances, the bonds are issued at 97 on July 1, 2006. The face value of the bonds is $10 million and is payable at maturity in 10 years. Answer the following questions:
Q1. Is the market rate of interest higher or lower than the interest rate stated on the bonds?
Q2. Determine the amount of discount or premium upon issuance of the bonds and show the journal entry you would propose to book the amounts related to the issuance.
Q3. Using straight-line amortization, determine the amount of discount or premium outstanding as of July 1, 2007.
Q4. Determine the amount of accrued interest payable as of December 31, 2007.