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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

ekkarill92 answered 4 weeks ago
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