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

Solution:

Requirement 1:

Amortization schedule as per effective interest rate

Date	Cash Paid	Interest Expense	Discount Amortized	Carrying Amount of Bonds
2/1/2014				$                                   213,510
30/6/14	$        10,925	$                  12,597	$                            1,672	$                                   215,182
31/12/14	$        10,925	$                  12,696	$                            1,771	$                                   216,953
30/6/15	$        10,925	$                  12,800	$                            1,875	$                                   218,828
31/12/15	$        10,925	$                  12,911	$                            1,986	$                                   220,814
30/6/16	$        10,925	$                  13,028	$                            2,103	$                                   222,917
31/12/16	$        10,925	$                  13,152	$                            2,227	$                                   225,144
30/6/17	$        10,925	$                  13,283	$                            2,358	$                                   227,503
31/12/17	$        10,925	$                  13,423	$                            2,498	$                                   230,000

Cash paid = Face value * Coupon Rate * 6/12

Interest expense = carrying amount * yield rate * 6/12

Discount Amortized = Cash Paid + Interest Expense.

Requirement 2:

Amortization schedule as per straight-line method

Date	Cash Paid	Interest Expense	Discount Amortized	Carrying Amount of Bonds
2/1/2014				$                                   213,510
30/6/14	$        10,925	$                  12,986	$                            2,061	$                                   215,571
31/12/14	$        10,925	$                  12,986	$                            2,061	$                                   217,632
30/6/15	$        10,925	$                  12,986	$                            2,061	$                                   219,693
31/12/15	$        10,925	$                  12,986	$                            2,061	$                                   221,754
30/6/16	$        10,925	$                  12,986	$                            2,061	$                                   223,815
31/12/16	$        10,925	$                  12,986	$                            2,061	$                                   225,876
30/6/17	$        10,925	$                  12,986	$                            2,061	$                                   227,937
31/12/17	$        10,925	$                  12,988	$                            2,063	$                                   230,000

Cash paid = Face value * Coupon Rate * 6/12

Discount Amortized = Total Discount / 8 periods

Interest expense = Cash paid + Discount Amortized

Requirement 3:

1) Journal Entry as on 30/06/16 as per effective interest rate

Date	Account title	Debit	Credit
30/06/16	Interest Expense	$                13,028
	Discount on Bonds Payable		$                   2,103
	Cash		$                 10,925
	( To record interest expense paid)

2) Journal Entry as on 30/06/16 as per straight-line method

Date	Account title	Debit	Credit
30/06/16	Interest Expense	$                12,986
	Discount on Bonds Payable		$                   2,061
	Cash		$                 10,925
	( To record interest expense paid)