Straight-Line versus Effective-Interest Amortization
Cyprus Corporation issued $150,000 of bonds on January 1, 2009, to raise funds to buy
some special machinery. The maturity date of the bonds is January 1, 2014, with interest
payable each January 1 and July 1. The stated rate of interest is 10%. When the bonds were
sold, the effective rate of interest was 12%. The company’s financial reporting year ends
December 31.
Required:
1. Determine the price at which the bonds would be sold.
2. Prepare the amortization schedule using the effective-interest method.
3. Prepare a comparative schedule of interest expense for each year (2009–2014) for the
effective-interest and straight-line methods of amortization.
4. Record the journal entry for the last payment using the amortization schedule in part (2).
5. Record the journal entry for the retirement of the bonds.

6. Interpretive Question: Is the difference between the interest expense each year
between the straight-line and effective-interest methods sufficient to require the use
of the effective-interest method? How do you think this question would be answered
in practice?