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

Essay

Newton Company issued its $1,000,000, 7%, ten-year bonds to the public on January 1, 2016. The bonds pay interest annually, beginning on December 31, 2016. Newton Company received $1,154,420 in cash at the issuance of the bonds. The market rate of interest when the bonds were issued was 5%. Newton Company 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 Company should amortize on December 31, 2016, assuming the effective-interest method is used.
B.Compute the amount of the premium that Newton Company should amortize on December 31, 2016, assuming the straight-line method is used.
C.Which method above is theoretically the better method to use for amortizing a bond premium?