Straight-Line versus Effective-Interest Amortization
Response to the following problem:
Foster Corporation issued three-year bonds with a $180,000 face value on March 1, 2008, in order to pay for a new computer system. The bonds mature on March 1, 2011, with interest payable on March 1 and September 1. The contract rate of interest is 10%. (Interest is compounded semiannually.) When the bonds were sold, the effective rate of interest was 12%. The company's fiscal year ends on February 28.
Required:
1. At what price were the bonds issued based on the information presented?
2. Prepare an amortization schedule using the effective-interest method.
3. Prepare a schedule of interest expense for each year (2008-2011), comparing the annual interest expense for straight-line and effective-interest amortization.
4. Using the amortization schedule prepared in part (2), prepare the journal entry to record the interest payment on September 1, 2008.
5. Prepare the adjusting journal entry to record accrued interest on February 28, 2009.
6. Prepare the journal entry to retire the bonds on March 1, 2011, assuming all interest has been paid prior to retirement.