(1)

On January 1, 2021 , Water Sports Company (WSC) borrowed $400,000 by issuing a 10% installment note. The installment note amortization table appears on page 400. Discuss each of the items:

If the annual payment is always $105,519, why does interest expense decrease each year?

How much is the total interest paid over the five year term of the note?

Before we loan money to WSC, we would want reasonable assurance the company has the ability to pay the note plus interest. Describe the financial information that would be most helpful in assessing the ability of WSC to pay this obligation.

(2)

Discuss two of the differences between borrowing cash by issuing an installment note payable over five years, similar to the WSC example on pages 399-401, and five-year bonds payable.

(3)

When bonds are issued at a discount, why is the amount of the discount spread over the life of the bond issue through amortization and added to the cash interest paid each six months to calculate total semiannual interest expense?

(4)

Discuss the interest rate conditions that would require a corporation to issue bonds at a discount by accepting less cash than the amount they must pay back for each bond?