Question

On January 1, 2018, Bradley Recreational Products issued $150,000, 12%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $141,044 to yield an annual return of 14%. (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 14%, what price would a second investor pay the first investor on June 30, 2020, for $21,000 of the bonds?

Answer 1

Solution 1:

Bond Amortization Schedule - Effective interst method
Period	Cash Paid	Interest Expense	Discoount Amortized	Unamortized Discount	Carrying Value
1-Jan-18				$8,956	$141,044
30-Jun-18	$9,000	$9,873	$873	$8,083	$141,917
31-Dec-18	$9,000	$9,934	$934	$7,149	$142,851
30-Jun-19	$9,000	$10,000	$1,000	$6,149	$143,851
31-Dec-19	$9,000	$10,070	$1,070	$5,080	$144,920
30-Jun-20	$9,000	$10,144	$1,144	$3,935	$146,065
31-Dec-20	$9,000	$10,225	$1,225	$2,711	$147,289
30-Jun-21	$9,000	$10,310	$1,310	$1,400	$148,600
31-Dec-21	$9,000	$10,400	$1,400	$0	$150,000

Solution 2:

Bond Amortization Schedule - Straight line method
Period	Cash Paid	Interest Expense	Discoount Amortized	Unamortized Discount	Carrying Value
1-Jan-18				$8,956	$141,044
30-Jun-18	$9,000	$10,120	$1,120	$7,837	$142,164
31-Dec-18	$9,000	$10,120	$1,120	$6,717	$143,283
30-Jun-19	$9,000	$10,120	$1,120	$5,598	$144,403
31-Dec-19	$9,000	$10,120	$1,120	$4,478	$145,522
30-Jun-20	$9,000	$10,120	$1,120	$3,359	$146,642
31-Dec-20	$9,000	$10,120	$1,120	$2,239	$147,761
30-Jun-21	$9,000	$10,120	$1,120	$1,120	$148,881
31-Dec-21	$9,000	$10,120	$1,120	$0	$150,000

Solution 3:

Journal Entries - Effective interest
Event	Particulars	Debit	Credit
30-Jun-20	Interest expense Dr	$10,144.00
	To Cash		$9,000.00
	To Discount on bond payable		$1,144.00
	(To record interest expense)
Journal Entries - Straight line method
Event	Particulars	Debit	Credit
30-Jun-20	Interest expense Dr	$10,120.00
	To Cash		$9,000.00
	To Discount on bond payable		$1,120.00
	(To record interest expense)

Solution 5:

Price to be paid by second investor to first investor on 30.06.2020 for $21,000 bond = Carrying value of bond on 30.06.2020 under effective interest method * $21,000 / $150,000

= $146,065*$21,000 / $150,000 = $20,449