Homework Answers
1) Premium on Investment = Issue Price - Face Value
= $409,991.12 - $400,000 = $9,991.12
No. of semi annual periods = 6 periods (from June 30, 2018 to June 30, 2021 i.e. 3 yrs)
Premium amortized under straight line method = $9,991.12/6 periods = $1,665.19
Interest income received in cash =$400,000*12%*6/12 = $24,000
a) Straight Line Method:-
Premium Amortization Schedule is shown as follows:- (Amounts in $)
| MERCER CORPORATION | ||||
| Bond Investment Interest Income and Premium Amortization Schedule | ||||
| Straight-Line Method | ||||
| Date | Cash Debit (A) | Investment in Debt Securities Credit (B) | Interest Income Credit (A-B) | Carrying Value of Debt Securities (reduce by B) |
| 06/30/18 | 409,991.12 | |||
| 12/31/18 | 24,000.00 | 1,665.19 | 22,334.81 | 408,325.93 |
| 06/30/19 | 24,000.00 | 1,665.19 | 22,334.81 | 406,660.74 |
| 12/31/19 | 24,000.00 | 1,665.19 | 22,334.81 | 404,995.55 |
| 06/30/20 | 24,000.00 | 1,665.19 | 22,334.81 | 403,330.36 |
| 12/31/20 | 24,000.00 | 1,665.19 | 22,334.81 | 401,665.17 |
| 06/30/21 | 24,000.00 | 1,665.17 (balance premium) | 22,334.83 | 400,000.00 |
b) Effective Interest Method:-
Under effective interest method interest income is credited with the amount equal to market rate multiplied by beginning carrying value of investment.
Premium Amortization Schedule is shown as follows:- (Amounts in $)
| MERCER CORPORATION | ||||
| Bond Investment Interest Income and Premium Amortization Schedule | ||||
| Effective Interest Method | ||||
| Date | Cash Debit (A) | Interest Income Credit (B = Beg carrying value*11%*6/12) | Investment in Debt Securities Credit (C = A-B) | Carrying Value of Debt Securities (reduce by C) |
| 06/30/18 | 409,991.12 | |||
| 12/31/18 | 24,000.00 | 22,549.51 | 1,450.49 | 408,540.63 |
| 06/30/19 | 24,000.00 | 22,469.73 | 1,530.27 | 407,010.36 |
| 12/31/19 | 24,000.00 | 22,385.57 | 1,614.43 | 405,395.93 |
| 06/30/20 | 24,000.00 | 22,296.78 | 1,703.22 | 403,692.71 |
| 12/31/20 | 24,000.00 | 22,203.10 | 1,796.90 | 401,895.81 |
| 06/30/21 | 24,000.00 | 22,104.19 (24,000-1,895.81) | 1,895.81 (balance premium) | 400,000.00 |
2) Straight Line Method:-
Journal entries (Amounts in $)
| Date | Account Titles and Explanations | Debit | Credit |
| 12/31/18 | Cash | 24,000 | |
| Investment in Debt Securities | 1,665.19 | ||
| Interest Income | 22,334.81 | ||
| (To record interest income) | |||
| 12/31/20 | Cash | 24,000 | |
| Investment in Debt Securities | 1,665.19 | ||
| Interest Income | 22,334.81 | ||
| (To record interest income) |
Effective Interest Method:-
Journal entries (Amounts in $)
| Date | Account Titles and Explanations | Debit | Credit |
| 12/31/18 | Cash | 24,000 | |
| Investment in Debt Securities | 1,450.49 | ||
| Interest Income | 22,549.51 | ||
| (To record interest income) | |||
| 12/31/20 | Cash | 24,000 | |
| Investment in Debt Securities | 1,796.90 | ||
| Interest Income | 22,203.10 | ||
| (To record interest income) |
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