Carter Corporation issued $400,000 in bonds that mature in 10 years. The bonds have a stated interest rate of 6 percent and pay interest on March 1 and September 1 . When the bonds were sold, the market rate of interest was 8 percent. Carter uses the effective-interest method. By December 31, 2003, the market rate of interest had increased to 10 percent.

Required: 1. What amount of bond liability is recorded on March 1, 2003? 2. What amount of interest is recorded on September 1 , 2003? 3. As a manager of a company, would you prefer the straight-line or effective-interest method? 4. Determine the impact of these transactions at year-end on the debt-to-equity ratio and times interest earned ratio.