Question

On January 1, 2017, Novak Company acquires $320,000 of Spiderman Products, Inc., 8% bonds at a price of $296,540. Interest is received on January 1 of each year, and the bonds mature on January 1, 2020. The investment will provide Novak Company a 11% yield. The bonds are classified as held-to-maturity.

Instructions

(a)  

Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the straight-line method.

(b)  

Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the effective-interest method.

(c)  

Prepare the journal entry for the interest revenue and discount amortization under the straight-line method at December 31, 2018.

(d)  

Prepare the journal entry for the interest revenue and discount amortization under the effective-interest method at December 31, 2018.

Answer 1

	a)	Bonds face value				320,000
		bonds issue price				-296,540
		discount on bonds				23,460
		discount amortized =23460/3=				7820
		year	interest	interest	Discount	Carrying
			paid	expense	amortized	value
			8%	11%
		1/1/2017				296,540
		1/1/2018	25600	33420	7820	304360
		1/1/2019	25,600	33420	7820	312180
		1/1/2020	25,600	33420	7820	320000
	b)
		year	interest	interest	Discount	Carrying
			paid	expense	amortized	value
			8%	11%
		1/1/2017				296,540
		1/1/2018	25600	32619	7019	303559
		1/1/2019	25,600	33392	7792	311351
		1/1/2020	25,600	34249	8649	320000
	c)	Journal entries
		Accounting titles & Explanations				Debit	Credit
	2018
	31-Dec	interest receivable				25,600
		discount on bonds payable				7,820
		interest income					33,420
	d)	Journal entries
		Accounting titles & Explanations				Debit	Credit
	2018
	31-Dec	interest receivable				25,600
		discount on bonds payable				7,019
		interest income					32,619