Determining the Purchase Price of Held-to-Maturity Securities and Effective-

Interest Amortization Corbett Corporation decided to purchase twenty $1,000, 10%, six-year bonds of Texas Manufacturing Company as a long-term investment on February 1, 2008. The bonds mature on February 1, 2014, and interest payments are made semiannually on February 1 and August 1.

Required:

1. How much should Corbett Corporation be willing to pay for the bonds if the current interest rate on similar bonds is 8%?

2. Prepare a schedule showing the amortization of the bond premium or discount over the remaining life of the bonds, assuming that Corbett Corporation uses the effectiveinterest method of amortization.

3. How much bond interest revenue would be recorded each year if the straight-line method of amortization were used? Show how these amounts differ from the annual interest recognized using the effective-interest method. (Assume a fiscal year ending July 31.)

4. Interpretive Question: Which of the two amortization methods is preferable? Why?