On January l of this year, Cunningham Corporation issued bonds with a face value of $200,000 and a coupon rate of 6 percent. The bonds mature in 10 years and pay interest annually every December 31. When the bonds were sold, the annual market rate of interest was 8 percent. The company uses the effective-interest amortization method. By December 31 of this year, the annual market rate of interest had increased to 10 percent.
Required:
1. What is the issuance price of the bonds on January 1?
2. What amount of interest expense is recorded on December 31 of this year?
3. Determine whether the company's debt-to-equity ratio and times interest earned ratio increase, decrease, or stay the same when (a) the bonds are issued and (b) interest expense is recorded and cash is paid to investors for interest.
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