Question: Andre s Imports issued 150 000 of bonds on January 1

Andre’s Imports issued $ 150,000 of bonds on January 1, 2009. The bonds mature on January 1, 2019. Interest is payable annually on December 31. The stated rate of interest is 10%, and the market rate of interest was 13% at the time of issue.

1. Calculate the proceeds for the bond issue. How would issuing the bonds affect the financial statements for Andre’s (on the date of issue)?
2. Prepare an amortization schedule for the first three years of the life of the bonds, showing the interest expense and the carrying value at the end of each interest period. Andre’s uses the effective interest method for amortizing discounts and premiums.
3. How much interest expense related to these bonds would Andre’s show on its income statement for the year ended December 31, 2010? (Assume effective interest method.)
4. Calculate the interest expense for the year ended December 31, 2010, using the straight- line method of amortization. Then, compare that amount to the amount calculated using the effective interest method. Which method do you think Andre’s should use and why?

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