Question

Tudor Company acquired $500,000 of Carr Corporation bonds for $487,706.69 on January 1, 2019. The bonds carry an 11% stated interest rate, pay interest semiannually on January 1 and July 1, were issued to yield 12%, and are due January 1, 2022.

Required:

1.	Prepare an investment interest income and discount amortization schedule using the:
a.	straight-line method
b.	effective interest method
2.	Prepare the July 1, 2021, journal entries to record the interest income under both methods.

1a. Prepare an investment interest income and discount amortization schedule using the straight-line method.

Amortization Schedule Instructions

TUDOR COMPANY

Bond Investment Interest Income and Discount Amortization Schedule

Straight-Line Method

1	Date	Cash Debit	Investment in Debt Securities Debit	Interest Income Credit	Carrying Value of Debt Securities
2	01/01/19
3	07/01/19
4	01/01/20
5	07/01/20
6	01/01/21
7	07/01/21
8	01/01/22

1b. Prepare an investment interest income and discount amortization schedule using the effective interest method.

Amortization Schedule Instructions

TUDOR COMPANY

Bond Investment Interest Income and Discount Amortization Schedule

Effective Interest Method

1	Date	Cash Debit	Interest Income Credit	Investment in Debt Securities Debit	Carrying Value of Debt Securities
2	01/01/19
3	07/01/19
4	01/01/20
5	07/01/20
6	01/01/21
7	07/01/21
8	01/01/22

2a. Prepare the July 1, 2021, journal entry to record the interest income under the straight-line method.

General Journal Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3

2b. Prepare the July 1, 2021, journal entry to record the interest income under the effective interest method.

General Journal Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3

Answer 1

Answer :

(1)	a.Straight -Line Method
		($)
	Face value	500,000.00
	Issue price	487,706.69
	Total discount	12,293.31
	Semi Annual Amortization	2,048.89
	Date	Cash Debit	Investment in Debit	Interest income credit	Carrying value of security
	1/1/2019				487,706.69
	1/1/2019	27,500.00	2,048.89	29,548.89	489,755.58
	1/1/2020	27,500.00	2,048.89	29,548.89	491,804.46
	1/1/2020	27,500.00	2,048.89	29,548.89	493,853.35
	1/1/2021	27,500.00	2,048.89	29,548.89	495,902.23
	1/1/2021	27,500.00	2,048.89	29,548.89	497,951.12
	1/1/2022	27,500.00	2,048.89	29,548.89	500,000.00
(b). Effective interest method
Date	Beginning book value	Cash receipt	Interest revenue	Difference	Carrying value of security
(1)	(2)	(3) 5.5% on face value	(4) = 6% on carrying amount	(5) = (4)- (3)	(6) = (2)-(5)
1/1/2019					487,706.69
1/1/2019	487,706.69	27,500.00	29,262.40	1,762.40	489,469.09
1/1/2020	489,469.09	27,500.00	29,368.15	1,868.15	491,337.24
1/1/2020	491,337.24	27,500.00	29,480.23	1,980.23	493,317.47
1/1/2021	493,317.47	27,500.00	29,599.05	2,099.05	495,416.52
1/1/2021	495,416.52	27,500.00	29,724.99	2,224.99	497,641.51
1/1/2022	497,641.51	27,500.00	29,858.49	2,358.49	500,000.00

2.(a) Journal Entries in Straight line Method
Date	Account title	Debit $	Credit $
1/72021	Cash	27,500.00
	Investment in securities	2,048.89
	Interest income		29,548.89
	(To record semi annual interest revenue)
2.(b). Effective Method
1/7/2021	Cash	27,500.00
	Investment in Securities	2,224.99
	Interest income		29,724.99
	(To record semiannual interest revenue)

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