Canadian Products Corporation manufactures office equipment and supplies. The company authorized a bond issue on January 1, 2013, with the following terms:
Maturity (par) value: $ 120,000,000
Interest: 7.9 percent per annum payable each December 31
Maturity date: December 31, 2017
Effective-interest rate when sold: 8 percent
Required:
1. Compute the bond issue price. Explain why both the stated and effective- interest rates are used in this computation.
2. Prepare the entry to record this bond issue.
3. Assume that the company used the straight- line method to amortize the discount or premium on the bond issue. Compute the following amounts for each year (2013– 2017):
a. Interest paid.
b. Amortization of bond discount or premium.
c. Bond interest expense.
d. Carrying amount of the bond.
e. Interest expense as a percentage of the carrying amount at the beginning of the year. The straight-line method is theoretically deficient when interest expense is related to the carrying amount of the debt. Explain.
4. Assume instead that the company used the effective- interest method to amortize the discount or premium. Prepare an effective-interest bond amortization schedule similar to the one in the text. The effective- interest method provides a constant interest rate when interest expense is related to the net liability. Explain by referring to the bond amortization schedule.
5. Which method should the company use to amortize the bond discount or premium? As a financial analyst, would you prefer one method over the other? If so, why?