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Mercer Corporation acquired $400,000 of Park Company’s bonds on June 30, 2018, for $409,991.12. The bonds...

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.

Solutions

Expert Solution

(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

ekkarill92 answered 1 year ago
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