Unformatted text preview: f $420.97
[from part (b)]. Under the straightline method, the company will recognize interest expense during 2012 of
$412.64 [from part (c)]. Thus, the straightline method results in lower expenses and higher net income in
the early periods of a note issued at a premium. e. Over the life of a note or bond, both the effectiveinterest and straightline methods will amortize the entire
discount or premium balance. Consequently, over the life of a note or bond, both methods will amortize
exactly the same amount of discount or premium. As noted in part (d), for notes issued at a premium, the
straightline method will recognize lower interest expense than the effectiveinterest method in the early
years of the note's life. The lower interest expense recognized under the straightline method will eventually have to be offset if both methods are to recognize the same amount of interest expense over the
life of the note. Consequently, the straightline method will have to recognize “relatively” higher interest
expense and, hence, lower net income in the later years of a note issued at a premium. P11–9
a. Note A
1/1/12
Present value (i = 6%, n = 3)
PV of face value
($1,000 .8396)
($1,000 .8900)
PV of interest payment
($100 2.6730)
($100 1.8334)
Total present value
present value
12/31/13
Present value (i = 6%, n = 1)
PV of face value
($1,000 .9434)
PV of interest payment
($100 .9434)
Total present value
Note B
1/1/12
Present value (i = 10%, n = 3)
PV of face value
($1,000 .75132)
($1,000 .82645)
PV of interest payment
($100 2.48685)
($100 1.73554)
Total present value
present value
12/31/13
Present value (i = 10%, n = 1)
PV of face value
($1,000 .90909)
PV of interest payment
($100 .90909)
Total present value $
$ 12/31/12
Present value (i = 6%, n = 2)
PV of face value
839.60
890.00
PV of interest payment
267.30 183.34
1,106.90
1,073.34 $ 943.40 $ 94.34
1,037.74 $
$ $
$ 12/31/12
Present value (i = 10%, n = 2)
PV of face value
751.32
826.45
PV of interest payment
248.69
173.55
1,000.00
1,000.00 $ 909.10 $ 90.91
1,000.00 $
$ Total Total P11–9 Continued Note C
1/1/12
Present value (i = 10%, n = 3)
PV of...
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 Fall '08
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 Accounting

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