Effective Interest vs. Straight-Line Discount Amortization
Response to the following problem:
Burr Motor Company, a manufacturer of small- to medium-sized electric motors, needs additional funds to market a revolutionary new motor. Burr has arranged for private placement of a $50,000, five-year, 11% bond issue. Interest on these bonds is paid annually each year on August 31. The issue was dated and sold on September 1, 2009, for proceeds of $48,197.62 to yield 12%. The company reverses any year-end adjusting entries.
Required
1. Prepare a bond interest expense and discount amortization schedule showing interest expense for each year, using the effective interest method.
2. Prepare journal entries to record the issuance of the bonds and the interest payments for 2010 and 2011, using (a) the effective interest method, and (b) the straight-line method.