Zapala Corporation has $10,000,000 of 9 percent, 20-year bonds dated June 1, 2014, with interest payment dates of May 31 and November 30. The company’s fiscal year ends November 30. It uses the effective interest method to amortize bond premiums or discounts.
Required
1. Assume the bonds are issued at 109.9 on June 1 to yield an effective interest rate of 8 percent. Prepare the journal entries for June 1, 2014, November 30, 2014, and May 31, 2015. (Round to the nearest dollar.)
2. Assume the bonds are issued at 91.4 on June 1 to yield an effective interest rate of 10 percent. Prepare the journal entries for June 1, 2014, November 30, 2014, and May 31, 2015. (Round to the nearest dollar.)
3. Explain the role that market interest rates play in causing a premium in requirement 1 and a discount in requirement 2.
