Response to the following problem:
Assume that on March 31, 20X6, Goretex Corp. issues 8%, 10-year notes payable with maturity value of $400,000. The notes pay interest on March 31 and September 30, and Goretex amortizes premium and discount by the straight-line method.
Required:
1. If the market interest rate is 7 1/2% when Goretex issues its notes, will the notes be priced at maturity (par) value, at a premium, or at a discount? Explain.
2. If the market interest rate is 9% when Goretex issues its notes, will the notes be priced at par, at a premium, or at a discount? Explain.
3. Assume that the issue price of the notes is 101. Journalize the following note payable transactions:
a. Issuance of the notes on April 1, 20X6.
b. Payment of interest and amortization of premium on September 30, 20X6.
c. Accrual of interest and amortization of premium on December 31, 20X6.
d. Payment of interest and amortization of premium on March 31, 20X7.