Having trouble understanding the below problem. After reviewing material, I still cannot determine answer.
Consider the following example. Bonds with a term of 5 years and face value of $1,000,000 are issued on January 1, 2017 for the amount of $900,000. The contract rate of interest is 10%. Market rate of interest is 12%. Interest is paid annually on December 31.
1) Calculate the amount of interest paid in 2017. Show details of your calculations.
Face value of $1,000,000 * 10% contract rate = $100,000 interest paid in 2017 —- My response. Not sure what to do with market rate of interest.
2) Write out the journal entry for the issuance of bonds on January 1.
3) Write out the journal entry to record Interest Expense on December 31. Discount or premium as applicable is amortized over a straight- line basis.