Mellilo Corporation issued $5 million of 20-year, 9.5 percent bonds on July 1, 2007, at 98.
Interest is due on June 30 and December 31 of each year, and all of the bonds in the issue mature on June 30, 2027. Mellilo’s fiscal year ends on December 31.
Prepare the following journal entries:
a. July 1, 2007, to record the issuance of bonds.
b. December 31, 2007, to pay interest, amortize the bond discount.
c. June 30, 2027, to pay interest, amortize the bond discount, and retire the bonds at maturity (make two separate entries).
d. Briefly explain the effect of amortizing the bond discount upon (1) annual net income and (2) annual net cash flow from operating activities. (Ignore possible income tax effects)