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 2 hours ago

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