Question

On January 1, 2021, Bradley Recreational Products issued $140,000, 8%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $130,952 to yield an annual return of 10%. (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, 2023, by each of the two approaches. 5. Assuming the market rate is still 10%, what price would a second investor pay the first investor on June 30, 2023, for $14,000 of the bonds? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 5 Prepare an amortization schedule that determines interest at the effective interest rate. (Enter your answers in whole dollars.) Payment Number Cash Payment Effective Interest Increase in Balance Carrying Value Totals

Answer 1

Requirement 1:

Effective interest method:

Payment Number	Cash Payment	Effective Interest	Increase in Balance	Carrying Value
				$130,952
1	$5,600	$6,548	$948	$131,900
2	$5,600	$6,595	$995	$132,895
3	$5,600	$6,645	$1,045	$133,940
4	$5,600	$6,697	$1,097	$135,037
5	$5,600	$6,752	$1,152	$136,189
6	$5,600	$6,809	$1,209	$137,398
7	$5,600	$6,870	$1,270	$138,668
8	$5,600	$6,933	$1,332	$140,000
Totals	$44,800	$53,849	$9,048

Cash payment = $140,000 x 4% = $5,600

Effective interest = Preceding carrying value x 5%

Increase in balance = Effective interest - Cash payment

Carrying value = Preceding carrying value + Increase in balance

Requirement 2:

Straight-line method:

Payment Number	Cash Payment	Recorded Interest	Increase in Balance	Carrying Value
				$130,952
1	$5,600	$6,731	$1,131	$132,083
2	$5,600	$6,731	$1,131	$133,214
3	$5,600	$6,731	$1,131	$134,345
4	$5,600	$6,731	$1,131	$135,476
5	$5,600	$6,731	$1,131	$136,607
6	$5,600	$6,731	$1,131	$137,738
7	$5,600	$6,731	$1,131	$138,869
8	$5,600	$6,731	$1,131	$140,000
Totals	$44,800	$53,848	$9,048

Cash payment = $140,000 x 4% = $5,600

Increase in balance = [$140,000-$130,952] ÷ 8 payments = $1,131

Effective interest = Cash payment + Increase in balance

Carrying value = Preceding carrying value + Increase in balance

Requirement 3:

Under effective interest,

Date	Account title and Explanation	Debit	Credit
June 30,2023	Interest expense	$6,752
	Discount on bonds payable		$1,152
	Cash		$5,600
	[To record payment of interest]

Under Straight-line:

Date	Account title and Explanation	Debit	Credit
June 30,2023	Interest expense	$6,731
	Discount on bonds payable		$1,131
	Cash		$5,600
	[To record payment of interest]

Requirement 4:

For $140,000, carrying value is $136,189

For $14,000, Carrying value is $13,619

Hence, The price of the bond of $14,000 for second investor on June 30,2023 is $13,619