Determining Reported Amounts with Discussion of Management Strategy (Effective-Interest Amortization)
On January 1, 2011, Cunningham Corporation issued $200.000 in bonds that mature in 10 years. The bonds have a stated interest rate of 6 percent and pay interest on December 31. When the bonds were sold, the market rate of interest was 8 percent. The company uses the effective-interest method. By December 31. 2011. the market rate of interest had increased to 10 percent.
Required:
1. What amount of bond liability is recorded on January 1.2011 ?
2. What amount of interest expense is recorded on December 31. 2011 ?
3. As a manager of a company, would you prefer the straight-line or effective-interest method of amortization?
4. Determine the impact of these transactions at year-end on the debt-to-equity ratio and times interest earned ratio.
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