Effective interest versus straight-line amortization
On January 1, 2012, Smith and Associates issued bonds with a face value of $1,000,000, a stated rate of interest of 9 percent, and a 20-year term to maturity. Interest is payable in cash on December 31 of each year. The effective rate of interest was 11 percent at the time the bonds were issued.
Required
Write a brief memo explaining whether the effective interest rate method or the straight-line method will produce the highest amount of interest expense recognized on the 2012 income statement.
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