In: Accounting
Mercer Corporation acquired $400,000 of Park Company’s bonds on June 30, 2018, for $409,991.12. The bonds carry a 12% stated interest rate and pay interest semiannually on June 30 and December 31. The appropriate market interest rate is 11%, and the bonds are due June 30, 2021.
Required:
1. | Prepare an investment interest income and premium amortization schedule, using the: |
a. | straight-line method |
b. | effective interest method |
2. | Prepare journal entries to record the December 31, 2018, and December 31, 2020, interest receipts using both methods. |
(1)(a)- Investment interest income and premium amortization schedule using straight-line method
Semiannual Period |
Cash Interest Paid |
Bond Interest Expense |
Amortization of Premium |
Unamortized Premium |
Carrying Value |
June 30, 2018 |
- |
- |
- |
9,991.12 |
4,09,991.12 |
Dec 31, 2018 |
24,000.00 |
22,334.81 |
1,665.19 |
8,325.93 |
4,08,325.93 |
June 30, 2019 |
24,000.00 |
22,334.81 |
1,665.19 |
6,660.75 |
4,06,660.75 |
Dec 31, 2019 |
24,000.00 |
22,334.81 |
1,665.19 |
4,995.56 |
4,04,995.56 |
June 30, 2020 |
24,000.00 |
22,334.81 |
1,665.19 |
3,330.37 |
4,03,330.37 |
Dec 31, 2020 |
24,000.00 |
22,334.81 |
1,665.19 |
1,665.19 |
4,01,665.19 |
June 30, 2021 |
24,000.00 |
22,334.81 |
1,665.19 |
- |
4,00,000.00 |
$144,000 |
$1,34,008.88 |
$ 9,991.12 |
Issue Price of Bond = $ 4,09,991.12
Face Value of Bond = $400,000
Premium on Bond Payable = $ 9,991.12 [$409,991.12 – 400,000]
(1)(b)- Investment interest income and premium amortization schedule using effective interest method
Semiannual Period |
Cash Interest Paid |
Bond Interest Expense |
Amortization of Premium |
Unamortized Premium |
Carrying Value |
June 30, 2018 |
- |
- |
- |
9,991.12 |
4,09,991.12 |
Dec 31, 2018 |
24,000.00 |
22,549.51 |
1,450.49 |
8,540.63 |
4,08,540.63 |
June 30, 2019 |
24,000.00 |
22,469.73 |
1,530.27 |
7,010.37 |
4,07,010.37 |
Dec 31, 2019 |
24,000.00 |
22,385.57 |
1,614.43 |
5,395.94 |
4,05,395.94 |
June 30, 2020 |
24,000.00 |
22,296.78 |
1,703.22 |
3,692.71 |
4,03,692.71 |
Dec 31, 2020 |
24,000.00 |
22,203.10 |
1,796.90 |
1,895.73 |
4,01,895.81 |
June 30, 2021 |
24,000.00 |
22,104.19 |
1,895.81 |
- |
4,00,000.00 |
$144,000 |
$1,34,008.88 |
$ 9,991.12 |
(a)-Journal entries to record the December 31, 2018, and December 31, 2020, interest receipts using both methods
Journal entries to record the December 31, 2018, and December 31, 2020, interest receipts using straight-line method
Date |
Account Titles and Explanation |
Debit ($) |
Credit ($) |
December 31, 2018 |
Interest Expenses A/c |
22,334.81 |
|
Premium on Bond Payable A/c |
1,665.19 |
||
To Cash A/c |
24,000.00 |
||
December 31, 2020 |
Interest Expenses A/c |
22,334.81 |
|
Premium on Bond Payable A/c |
1,665.19 |
||
To Cash A/c |
24,000.00 |
||
Journal entries to record the December 31, 2018, and December 31, 2020, interest receipts using effective interest method
Date |
Account Titles and Explanation |
Debit ($) |
Credit ($) |
December 31, 2018 |
Interest Expenses A/c |
22,549.51 |
|
Premium on Bond Payable A/c |
1,450.49 |
||
To Cash A/c |
24,000.00 |
||
December 31, 2020 |
Interest Expenses A/c |
22,203.10 |
|
Premium on Bond Payable A/c |
1,796.90 |
||
To Cash A/c |
24,000.00 |
||