Task:
On February 28, 2006, Pujols Industries issued 10% bonds, dated January 1, with a face amount of $48 million. The bonds were priced at $42 million (plus accrued interest) to yield is 12%. The effective interest method is used. Interest is paid semiannually on June 30 and December 31. Pujols' fiscal year ends October 31st.
Required:
1. What would be the amount(s) related to the bonds Pujols would report in its balance sheet at October 31, 2006?
2. What would be the amount(s) related to the bonds that Pujols would report in its income statement for the year ended October 31, 2006?
3. Why is the effective-interest method the accounting profession's preferred procedure for amortization of a discount or premium on bonds payable?
4. Why is the straight-line method used by most companies for amortization of a discount or premium?