AP$9-5$ Computing Amounts for Bond Issue, and Comparing Amortization Methods $($P$9-8)$

Canadian Products Corporation manufactures office equipment and supplies. The company authorized a bond issue on January $1,$ year

$1,$ with the following terms:

Maturity $($par$)$ value: $$120,000,000$

Interest: $7\mathrm{.}9$ percent per year payable each December $31$

Maturity date: December $31,$ year $5$

Effective$-$interest rate when sold: $8$ percent

Required:

Compute the bond issue price. Explain why both the stated and effective$-$interest rates are used in this computation.

Prepare the entry to record this bond issue without a bond discount or premium account.

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 of the five years:

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.

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.

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?