Question

On January 1, 2014, Apple Smith Co. issued $200,000, 9%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $187,330.87 to yield an annual return of 11%.

Required:

1. Prepare an amortization schedule that determines interest at the effective interest rate for each period.

2. Prepare an amortization schedule by the straight-line method for each of the eight interest payment periods.

3. Prepare the journal entries to record interest expense on June 30, 2016, for each of the two approaches, making sure to separate the interest payment from the amortization of the discount.

Answer 1

	Interest is paid semi-annually
	Stated interest rate=9%*1/2=4.5%
	Market interest rate=11%*1/2=5.5%
	Bond discount=200000-187330.87=12669.13=12670
1	A	B	C	D	E	F	G
	Date	Interest Payment	Interest Expense	Amortization Of discount	Balance in bond Discount	Balance in bond Payable	Book value
		(4.5%*Face Value)	(5.5%* Previous value in G	(C-B)			(F-E)
	Jan 1,2014				12670	200000	187330
	June 30,2014	9000	10303	1303	11367	200000	188633
	December 31,2014	9000	10375	1375	9992	200000	190008
	June 30,2015	9000	10450	1450	8542	200000	191458
	December 31,2015	9000	10530	1530	7011	200000	192989
	June 30,2016	9000	10614	1614	5397	200000	194603
	December 31,2016	9000	10703	1703	3694	200000	196306
	June 30,2017	9000	10797	1797	1897	200000	198103
	December 31,2017	9000	10896	1896	1	200000	199999
	Difference of $1 is due to round off
2	Amortization of discount per semi annual period=12670/8=1583.75=1584
	A	B	C	D	E	F	G
	Date	Interest Payment	Interest Expense	Amortization Of discount	Balance in bond Discount	Balance in bond Payable	Book value
		(4.5%*Face Value)	(B+D)				(F-E)
	Jan 1,2014				12670	200000	187330
	June 30,2014	9000	10584	1584	11086	200000	188914
	December 31,2014	9000	10584	1584	9502	200000	190498
	June 30,2015	9000	10584	1584	7918	200000	192082
	December 31,2015	9000	10584	1584	6334	200000	193666
	June 30,2016	9000	10584	1584	4750	200000	195250
	December 31,2016	9000	10584	1584	3166	200000	196834
	June 30,2017	9000	10584	1584	1582	200000	198418
	December 31,2017	9000	10584	1584	-2	200000	200002
	Difference of $2 is due to round off
3	Journal entries:
	Date	Accoun tiltles			Debit	Credit
	Effective interest method:
	June 30,2016	Interest expense			10614
		Bond discount				1614
		Interest payable				9000
		(Interest on bond due)
	Straight line method:
	June 30,2016	Interest expense			10584
		Bond discount				1584
		Interest payable				9000
		(Interest on bond due)