Question

On January 1, 2018, Bradley Recreational Products issued $100,000, 11%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $96,895 to yield an annual return of 12%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1and 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, 2020, by each of the two approaches.
5. Assuming the market rate is still 12%, what price would a second investor pay the first investor on June 30, 2020, for $12,000 of the bonds?

Answer 1

Answer 1.

Face Value of Bonds = $100,000
Issue Value of Bonds = $96,895

Discount on Bonds = Face Value of Bonds - Issue Value of Bonds
Discount on Bonds = $100,000 - $96,895
Discount on Bonds = $3,105

Annual Coupon Rate = 11%
Semiannual Coupon Rate = 5.50%
Semiannual Coupon = 5.50% * $100,000
Semiannual Coupon = $5,500

Time to Maturity = 4 years
Semiannual Period = 8

Semiannual Amortization of Discount = Discount on Bonds / Semiannual Period
Semiannual Amortization of Discount = $3,105 / 8
Semiannual Amortization of Discount = $388

Semiannual Interest Expense = Semiannual Coupon + Semiannual Amortization of Discount
Semiannual Interest Expense = $5,500 + $388
Semiannual Interest Expense = $5,888

Answer 2.

Annual Interest Rate = 12%
Semiannual Interest Rate = 6%

Answer 3.

Answer 4.

June 30, 2020:

Market Value of $100,000 Bonds = $98,663
Market Value of $1,000 Bonds = $986.63 ($98,663 / 100)
Market Value of $12,000 Bonds = $11,840 ($986.63 * 12)