Question

Otter Products Inc. issued bonds on January 1, 2019. Interest is to be paid semi-annually. Other information is as follows: Term in years: Face value of bonds issued: Issue price: Specified interest rate each payment period: $200,000 S206,000 6% Required 1 Calculate a. The amount of interest paid in cash every payment period. b. The amount of amortization to be recorded at each interest payment date (use the straight-line method). 2 amortization table by calculating interest expense, and beginning and ending bond carrying amounts at the end of each period over three years. Amortization Table Ending bond Period Beg bond Periodicual Periodic cash carrying interest (prem.) expense paid Year carrying amort 2019 Jun. 30 Dec. 31 Jun. 30 Dec. 31 Jun. 30 Dec. 31 2020 2021 3 Calculate the actual interest rate under the straight-line method of amortization for each six-month period. Round all percentage calculations to two decimal placed. Use the following format Bond Six-month Six month period ending crying interest expense Year 2019 2020 2021 (B/A) Jun. 30 Dec. 31 Jun. 30 Dec. 31 Jun. 30 Dec. 31 4 Prepare the journal entry for December 31, 2019.

Answer 1

Face value of bond - $ 200000

Issue price of bond - $ 206000

Interest rate – 6 %( Semi – annually)

Maturity – 3 years

Solution – 1

A. Calculation of interest paid in cash every payment period

$200000 × 3% (interest paid semi-annually 6% / 2) = $6000

B. Calculation of amortization amount (use the straight-line method)

Premium on bond issue = $206000 - $200000 = $6000 (Premium)

Amortization amount for each period = $6000/6 = $1000

Solution – 2

Period	Interest paid @3% of $200000	Beginning value of bond	Amortization premium	Ending value of bond
June 30 2019	6000	20000	1000	205000
Dec 31 2019	6000	205000	1000	204000
June 30 2020	6000	204000	1000	203000
Dec 31 2020	6000	203000	1000	202000
June 30 2021	6000	202000	1000	201000
Dec 31 2021	6000	201000	1000	200000

Solution – 3

Calculation of Actual interest (use the straight-line method)

Premium on bond issue = $206000 - $200000 = $6000 (Premium)

Amortization amount for each period = $6000/6 = $1000

Interest received per bond payment =$6000 + 1000 = 7000

Divide the result by the average of the Premium price paid for the bond and the bond’s face value = 7000 / (206000 + 200000 /2) =0.0344

Effective interest rate for the Premium bond = 100 × 0.0344 =3.44%

Interest amount = 206000 × 3.44% =7086

Amortization amount for each instalment = 7086/6 =1181