Question

On January 1, 2018, Bradley Recreational Products issued $100,000, 12%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $94,029 to yield an annual return of 14%. (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, 2020, by each of the two approaches.
5. Assuming the market rate is still 14%, what price would a second investor pay the first investor on June 30, 2020, for $14,000 of the bonds?

Answer 1

Amortization table-Effective Interest method
Date	Interest Payment($100,000*6.00%)	Interest expenses(Bond carrying amount*7%)	Discount amorrtization	Bond carrying amount
01-Jan-18				94,029
30-Jun-18	6,000	6,582	582	94,611
31-Dec-18	6,000	6,623	623	95,234
30-Jun-19	6,000	6,666	666	95,900
31-Dec-19	6,000	6,713	713	96,613
30-Jun-20	6,000	6,763	763	97,376
31-Dec-20	6,000	6,816	816	98,192
30-Jun-21	6,000	6,873	873	99,066
31-Dec-21	6,000	6,934	934	1,00,000
	Date	Accounts and explanation	Debit(in $)	Credit(in $)
	30-Jun-20	Interest Expenses	6,763
		Discounts on Bond payable		763
		Cash		6,000
On June 2020 if an investor wants to buy then he has to pay $13,633($97,376*14,000/100,000)
5971
Amortization table-Straight-Line method
Discount on Bond =$100,000 - $94,029 =$5,971
Date	Interest Payment	Interest expenses	Discount amorrtization	Bond carrying amount
01-Jan-18				94,029
30-Jun-18	6,000	6,746	746	94,775
31-Dec-18	6,000	6,746	746	95,522
30-Jun-19	6,000	6,746	746	96,268
31-Dec-19	6,000	6,746	746	97,015
30-Jun-20	6,000	6,746	746	97,761
31-Dec-20	6,000	6,746	746	98,507
30-Jun-21	6,000	6,746	746	99,254
31-Dec-21	6,000	6,746	746	1,00,000
	Date	Accounts and explanation	Debit(in $)	Credit(in $)
	30-Jun-20	Interest Expenses	6,746
		Discounts on Bond payable		746
		Cash		6,000
On June 2020 if an investor wants to buy then he has to pay $13,687($97,761*14,000/100,000)