Newton Corporation Issued Its $1,000,000, 7%, Ten-Year Bonds to the Public

Essay

Newton Corporation issued its $1,000,000, 7%, ten-year bonds to the public on January 1, 2014. The bonds pay interest annually, beginning on December 31, 2014. Newton Corporation received $1,153,420 in cash at the issuance of the bonds. The market rate of interest when the bonds were issued was 5%. Newton Corporation has a December 31 year-end. Assume that no adjusting journal entries have been made during the year.
Required:
A. Compute the amount of the premium that Newton Corporation should amortize on December 31, 2014, assuming the effective-interest method is used.
B. Compute the amount of the premium that Newton Corporation should amortize on December 31, 2014, assuming the straight-line method is used.
C. Which method above is theoretically the better to use for amortizing a bond premium?