Consider the three notes payable listed here. Each was issued on January 1, 1997, and matures on December 31, 1999. Interest payments are made annually on December 31. Note Face Value Stated Effective Interest Rate Interest Rate A $1,000 10% 6% B $1,000 10 10 C $1,000 6 10 REQUIRED:

a. Compute the present value of the remaining cash outflows for each note at each date. Note 1/1/97 12/31/97 12/31/98 A B C

b. Compute the balance sheet value of each note payable at each of the above dates using the effective interest method.

c. Compute the balance sheet values of each note payable at each of the above dates using the straight-line method (i.e., amortize an equal amount of the discount or premium each year).

d. Why is the effective interest method preferred to the straight-line method for financial reporting purposes?