P9-79B (L earn i ng Obj ec tiv es 1 , 2 , 5: I ss u e b onds a t a d i sco u n t; a m or tiz e b y t

P9-79B (Learning Objectives 1, 2, 5: Issue bonds at a discount; amortize by the straight-line method; report bonds payable and accrued interest payable on the balance sheet) On February 28, 2012, Starfish Corp. issues 10%, five-year bonds payable with a face value of $1,200,000. The bonds pay interest on February 28 and August 31. Starfish Corp. amortizes bonds by the straight-line method.

▶ Requirements

1. If the market interest rate is 9% when Starfish Corp. issues its bonds, will the bonds be priced

at par, at a premium, or at a discount? Explain.

2. If the market interest rate is 11% when Starfish Corp. issues its bonds, will the bonds be priced at par, at a premium, or at a discount? Explain.

3.    Assume that the issue price of the bonds is 96. Journalize the following bond transactions.

a.    Issuance of the bonds on February 28, 2012

b.   Payment of interest and amortization of the bonds on August 31, 2012

c.    Accrual of interest and amortization of the bonds on December 31, 2012, the year-end

d.   Payment of interest and amortization of the bonds on February 28, 2013

4.    Report interest payable and bonds payable as they would appear on the Starfish Corp. balance sheet at December 31, 2012.