Elizabeth Hannon, an intermediate accounting student, is having difficulty amortizing bond premiums and discounts using the effective-interest method. Furthermore, she cannot understand why GAAP requires that this method be used instead of the straight-line method. She has come to you with the following problem, looking for help. On June 30, 2018, Golden Company issued $3,000,000 face value of 11%, 20-year bonds at $3,257,400, a yield of 10%. Golden Company uses the effective-interest method to amortize bond premiums or discounts. The bonds pay semiannual interest on June 30 and December 31. Prepare an amortization schedule for four periods.

Respond to the following prompts:

Using the data above for illustrative purposes, write a short memo to Elizabeth explaining what the effective-interest method is, why it is preferable, and how it is computed.

Under what circumstances would Elizabeth be able to use the straight-line method? In your opinion, what is the accounting principle that supports this?

Indicate how this can be done and the correct accounting treatment for such a transaction.