Exercise 14-6 (Algo) Bonds; issuance; effective interest [LO14-2] The Gorman Group issued $900,000 of 11% bonds on June 30, 2021, for $977,220. The bonds were dated on June 30 and mature on June 30, 2041 (20 years). The market yield for bonds of similar risk and maturity is 10%. Interest is paid semiannually on December 31 and June 30. Required: 1. to 3. Prepare the journal entries to record their issuance by The Gorman Group on June 30, 2021, interest on December 31, 2021 and interest on June 30, 2022 (at the effective rate).

1) June 30, 2021, bonds are issued at a premium.

Dr Cash 977,220

    Cr Bonds payable 900,000

    Cr Premium on bonds payable 77,220

2) December 31, 2021, first coupon payment

Dr Interest expense 48,861

Dr Premium on bonds payable 639

    Cr Cash 49,500

amortization of premium on bonds payable = (977,220 x 5%) - 49,500 = -639

3) June 30, 2022, second coupon payment

Dr Interest expense 48,829

Dr Premium on bonds payable 671

    Cr Cash 49,500

amortization of premium on bonds payable = (976,581 x 5%) - 49,500 = -670.95 ≈ -671

answer: in the short-run firms will respond by raising the price of turkey.

explanation: initially the long-run equilibrium is at a price of $5 per pound of turkey and a quantity of 50 million pounds per year. now, when webmd claims that a protein found in turkey will increase your expected lifespan by 4 years. the consumers demand for turkey will increase at every price shifting the demand curve to the right from d1 to d2. while, there will be no change in the supply curve in the short-run as it is not possible for producers to adjust supply so quickly. as a result the new equilibrium will occur at a higher price and a higher quantity of turkey.

thus, in the short run firms will respond by increasing the price of turkey, selling more quantity at a higher price and earning economic profits.