The Baxter Corporation issued $400,000 of 11% bonds for $385,279.91 on January 1, 2006. The bonds pay interest semiannually on June 30 and December 31, were issued to yield 12%, and are due on December 31, 2010. Interest is amortized using the effective interest method, and the bonds are callable at 105. In 2008 Baxter wishes to take advantage of more favorable market interest rate conditions and issues $450,000 of 11%, 10-year bonds at 102 on June 1. Interest on these bonds is payable each May 31 and November 30. Sufficient proceeds from this issue are used to recall the original issue on July 1, 2008.
1. Prepare the journal entries to record
(a) The original issue,
(b) The new issue, and
(c) The recall of the old issue.
2. If the company were required to reflect the current yield each year, describe how it would account for the bonds. For simplicity, assume that the yield changes from 12% to 11% on January 1, 2008. No calculations are required.