Straight-line and effective interest compared
Response to the following problem:
On January 1, 2016, Bradley Recreational Products issued $100,000, 9%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $96,768 to yield an annual return of 10%.
Required:
1. Prepare an amortization schedule that determines interest at the effective interest rate.
2. Prepare an amortization schedule by the straight-line method.
3. Prepare the journal entries to record interest expense on June 30, 2018, by each of the two approaches.
4. Explain why the pattern of interest differs between the two methods.
5. Assuming the market rate is still 10%, what price would a second investor pay the first investor on June 30, 2018, for $10,000 of the bonds?