On January 1, 2014, 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, 2014, the market rate of interest had increased to 10 percent.

1. What amount of bond liability is recorded on January 1, 2014?
2. What amount of interest expense is recorded on December 31, 2014?
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.

  • CreatedJuly 01, 2014
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