Corbett Corporation decided to purchase twenty $1,000, 10%, six-year bonds of Texas Manufacturing Company as a long-term investment on February 1, 2011. The bonds mature on February 1, 2017, and interest payments are made semiannually on February 1 and August 1.

Required:

1. How much should Corbett be willing to pay for the bonds if the current interest rate on similar bonds is 8%?

2. Prepare a schedule showing the amortization of the bond premium or discount over the remaining life of the bonds, assuming that Corbett uses the effective-interest method of amortization.

3. How much bond interest revenue would be recorded each year if the straight-line method of amortization were used? Show how these amounts differ from the annual interest recognized using the effective-interest method. (Assume a fiscal year ending July 31.)

4. Interpretive Question: Which of the two amortization methods is preferable? Why?