Question

On January 1, 2018, Bradley Recreational Products issued $125,000, 10%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $117,237 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.
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.
5. Assuming the market rate is still 12%, what price would a second investor pay the first investor on June 30, 2020, for $15,000 of the bonds?

Answer 1

1)Semiannual Interest Paid : 125000 *.10 *6/12 = 6250

Semiannual month = 4*2 =8

semiannual yield : 12*6/12 = 6%

Period ending	Interest paid	Interest expense	Discount amortised	carrying value
30June 2018	6250	7034.22    [117237*.06]	784.22    [7034.22-6250]	118021.22   [117237+784.22]
31Dece2018	6250	7081.27   [118021.22*.06]	831.27    [7081.27-6250]	118852.49
30June2019	6250	7131.15	881.15	119733.64
31Dec 2019	6250	7184.02	934.02	120667.66
30June 2020	6250	7240.06	990.06	121657.72
31Dec 2020	6250	7299.46	1049.46	122707.18
30June 2021	6250	7362.43	1112.43	123819.61
31dec 2021	6250	7429.18	1179.18	124998.79    [rounded to 125000]

2)Discount On Bond : 125000- 117237 =7763

Amortisation Per Month : 7763/8= 970.38

Period ended	Interest paid	Interest expense	discount amortised	carrying value
30June 2018	6250	7220.38    [6250+970.38]	970.38	118207.38   [117237+970.38]
31dec 2018	6250	7220.38	970.38	119177.76    [118207.38+970.38]
30June 2019	6250	7220.38	970.38	120148.14
31dec 2019	6250	7220.38	970.38	121118.52
30June 2020	6250	7220.38	970.38	122088.9
31dec 2020	6250	7220.38	970.38	123059.28
30June 2021	6250	7220.38	970.38	124029.66
31dec 2021	6250	7220.38	970.38	125000

3)

Date	Account	Debit	credit
Effective Interest method
30 June2020	Interest expense	7240.06
	Discount on bond payable		990.06
	Cash		6250
Straight line	Interest expense	7220.38
	Discount on bond payable		970.38
	cash		6250

5)Period Left to maturity : 3 semiannual months

Amount to pay .:[PVA6%,3*Interest] +[PVF6%,3*Face value]

     =[2.67301* 750]+ [ .83962*15000]

    = 2004.76+ 12594.3

    = $ 14599.06

**Interest = 15000*.10*6/12=750

Present value annuity factor and present value factor can be find from there table respectively.