Question

On January 2, 2014, Apple Smith Co. issued $230,000 in four-year bonds, with a stated interest rate of 9.5%. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $213,510 to yield an annual return of 11.8%. Required: 1. Prepare an amortization schedule that determines interest at the effective interest rate for each period. Round all calculations to dollars. 2. Prepare an amortization schedule by the straight-line method for each of the eight interest payment periods. Again, round all calculations. (5 pts) 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

Part 1-Effective Interest method
Date	Cash Paid($230,000*4.75%)	Interest expenses(Bond carrying amount*5.9%)	Increase in carrying value	Bond carrying amount
Col I	Col II	Col III	Col IV(Col III - Col II)	Col V
02-Jan-14				$                            2,13,510
30-Jun-14	$                                                      10,925	$                                                            12,597	$                                              1,672	$                            2,15,182
31-Dec-14	$                                                      10,925	$                                                            12,696	$                                              1,771	$                            2,16,953
30-Jun-15	$                                                      10,925	$                                                            12,800	$                                              1,875	$                            2,18,828
31-Dec-15	$                                                      10,925	$                                                            12,911	$                                              1,986	$                            2,20,814
30-Jun-16	$                                                      10,925	$                                                            13,028	$                                              2,103	$                            2,22,917
31-Dec-16	$                                                      10,925	$                                                            13,152	$                                              2,227	$                            2,25,144
30-Jun-17	$                                                      10,925	$                                                            13,283	$                                              2,358	$                            2,27,503
31-Dec-17	$                                                      10,925	$                                                            13,423	$                                              2,498	$                            2,30,000
Date	Accounts and explanation	Debit(in $)	Credit(in $)
30-Jun-16	Interest expenses	$                                                            13,028
	Discount on Bonds Payable		$                                              1,672
	Cash		$                                            10,925
Part 2-Straight-Line method
Discount on Bond =$230,000 - $213,510 =$16,490
Date	Interest Payment	Interest expenses	Discount amorrtization	Bond carrying amount
02-Jan-14	-	-	-	2,13,510
30-Jun-14	10,925	12,986	2,061	2,15,571
31-Dec-14	10,925	12,986	2,061	2,17,633
30-Jun-15	10,925	12,986	2,061	2,19,694
31-Dec-15	10,925	12,986	2,061	2,21,755
30-Jun-16	10,925	12,986	2,061	2,23,816
31-Dec-16	10,925	12,986	2,061	2,25,878
30-Jun-17	10,925	12,986	2,061	2,27,939
31-Dec-17	10,925	12,986	2,061	2,30,000
Date	Accounts and explanation	Debit(in $)	Credit(in $)
30-Jun-16	Interest expenses	$                                                            12,986
	Discount on Bonds Payable		$                                              2,061
	Cash		$                                            10,925