Question
In: Accounting
On January 1, 2018, Bradley recreational Products issued $150,000, 9%, 4 year bonds. Interest is paid...
On January 1, 2018, Bradley recreational Products issued $150,000, 9%, 4 year bonds. Interest is paid semi-annually on June 30 and December 31. The bonds were issued at $136,028 to yield an annual return of 12%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1, and PVAD of $1)( Use appropriate factor(s) from the tables provided.) Required: 1. Prepare an amortization schedule that determines interest at the effective interest rate. (Enter your answer in whole dollars) 2. Prepare an amortization schedule by the straight-line method. 3. Prepare the journal entries to record interest expense on June 30, 2020, by each of the two approaches. 4. Assuming the market rate is still 12%, what price would a second investor pay the first investor on June 30, 2020, for $18,000 of the bonds? (Round intermediate calculation and final answer to nearest whole dollar)
Solutions
Expert Solution
| 1. Amortization table using effective interest rate method | |||||
| Period | Cash Interest @ 4.5% | Effective interest @ 6% | Increase in Balance | Outstanding Balance | |
| 0 | 136028 | ||||
| 1 | 6750 | 8162 | 1412 | 137440 | |
| 2 | 6750 | 8246 | 1496 | 138936 | |
| 3 | 6750 | 8336 | 1586 | 140522 | |
| 4 | 6750 | 8431 | 1681 | 142204 | |
| 5 | 6750 | 8532 | 1782 | 143986 | |
| 6 | 6750 | 8639 | 1889 | 145875 | |
| 7 | 6750 | 8752 | 2002 | 147877 | |
| 8 | 6750 | 8873 | 2123 | 150000 | |
| The cash interest is calculated on the par value of bond which is calculated as 150000*4.5% | $6,750 | ||||
| Effective interest is calculated on the previous period outstanding balance. | |||||
| Say for period 2 the effective interest is calculated as 137440*6% | 8246 | ||||
| 2. Amortization using the straight line method | |||||
| Discount on issue of bond = 150000-136028 | 13972 | ||||
| Amortization of discount = 13972/8 | 1747 | ||||
| Period | Cash Interest @ 4.5% | Recorded interest | Increase in Balance | Outstanding Balance | |
| 0 | $136,028 | ||||
| 1 | $6,750 | $8,497 | $1,747 | $137,775 | |
| 2 | $6,750 | $8,497 | $1,747 | $139,521 | |
| 3 | $6,750 | $8,497 | $1,747 | $141,268 | |
| 4 | $6,750 | $8,497 | $1,747 | $143,014 | |
| 5 | $6,750 | $8,497 | $1,747 | $144,761 | |
| 6 | $6,750 | $8,497 | $1,747 | $146,507 | |
| 7 | $6,750 | $8,497 | $1,747 | $148,254 | |
| 8 | $6,750 | $8,497 | $1,747 | $150,000 | |
| The balance will increase by same amount each year under straight line method | |||||
| 3 | |||||
| Journal entry under effective interest method | |||||
| Date | Particulars | Debit | Credit | ||
| 30-Jun-20 | Interest expense | $8,532 | |||
| Discount on bond payable | $1,782 | ||||
| Cash | $6,750 | ||||
| Journal entry under straight line method | |||||
| Date | Particulars | Debit | Credit | ||
| 30-Jun-20 | Interest expense | $8,497 | |||
| Discount on bond payable | $1,747 | ||||
| Cash | $6,750 | ||||
| 4 | |||||
| Calculation of price of bond for investor who wants to purchase $18,000 worth of bonds | |||||
| Price of bond = Present value of coupon payment + Present value of par value | |||||
| Period | Cash flow (18000*4.5%) | Discount factor @ 6% | Present value | ||
| 1 | 810 | 0.94340 | $764 | ||
| 2 | 810 | 0.89000 | $721 | ||
| 3 | 18810 | 0.83962 | $15,793 | ||
| Present value | $17,278 | ||||
| The second investor would pay $17,278 for $18,000 of the bonds on June 30, 2020 | |||||
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