Question

Tudor Company acquired $500,000 of Carr Corporation bonds for $487,706.69 on January 1, 2018. The bonds carry an 11% stated interest rate, pay interest semiannually on January 1 and July 1, were issued to yield 12%, and are due January 1, 2021.

Required:

1.

Prepare an investment interest income and discount amortization schedule using the:

a.

straight-line method

b.

effective interest method

2.

Prepare the July 1, 2020, journal entries to record the interest income under both methods.

Prepare the July 1, 2020, journal entry to record the interest income under the straight-line method.Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3

Prepare the July 1, 2020, journal entry to record the interest income under the effective interest method. Additional Instructions

PAGE 1

GENERAL JOURNAL

DATE

ACCOUNT TITLE

POST. REF.

DEBIT

CREDIT

1

2

3

Prepare an investment interest income and discount amortization schedule using the straight-line method. Additional Instructions

TUDOR COMPANY

Bond Investment Interest Income and Discount Amortization Schedule

Straight-Line Method

1	Date	Cash Debit	Investment in Debt Securities Debit	Interest Income Credit	Carrying Value of Debt Securities
2	01/01/18
3	07/01/18
4	01/01/19
5	07/01/19
6	01/01/20
7	07/01/20
8	01/01/21

Prepare an investment interest income and discount amortization schedule using the effective interest method. Additional Instructions

TUDOR COMPANY

Bond Investment Interest Income and Discount Amortization Schedule

Effective Interest Method

1	Date	Cash Debit	Interest Income Credit	Investment in Debt Securities Debit	Carrying Value of Debt Securities
2	01/01/18
3	07/01/18
4	01/01/19
5	07/01/19
6	01/01/20
7	07/01/20
8	01/01/21

Answer 1

1	Investment interest income is calculated as under:
	a. By Straight line method
		A	B	C	D	E	F
	Semiannual Interest Period	Carrying Value at beginning of period	Semiannual Interest Expense at 12% to be recorded	Semiannual Interest payment to bondholders	Amortization of Bond Discount	Unamortised Bond Discount at end of Period	Carrying Value at end of period
			C+D	5.5% of 500,000	(B-C)	(E-D)	(A+D)
	1/1/2018					12,293	487,707
	7/1/2018	487,707	29,549	27,500	2,049	10,244	489,756
	1/1/2019	489,756	29,549	27,500	2,049	8,196	491,804
	7/1/2019	491,804	29,549	27,500	2,049	6,147	493,853
	1/1/2020	493,853	29,549	27,500	2,049	4,098	495,902
	7/1/2020	495,902	29,549	27,500	2,049	2,049	497,951
	1/1/2021	497,951	29,549	27,500	2,049	0	500,000
	b. By interest Method
		A	B	C	D	E	F
	Semiannual Interest Period	Carrying Value at beginning of period	Semiannual Interest Expense at 12% to be recorded	Semiannual Interest payment to bondholders	Amortization of Bond Discount	Unamortised Bond Discount at end of Period	Carrying Value at end of period
			6% of A	5.5% of 500,000	(B-C)	(E-D)	(A+D)
	1/1/2018					12,293	487,707
	7/1/2018	487,707	29,262	27,500	1,762	10,531	489,469
	1/1/2019	489,469	29,368	27,500	1,868	8,663	491,337
	7/1/2019	491,337	29,480	27,500	1,980	6,683	493,317
	1/1/2020	493,317	29,599	27,500	2,099	4,584	495,417
	7/1/2020	495,417	29,725	27,500	2,225	2,359	497,642
	1/1/2021	497,642	29,858	27,500	2,358	1	500,000
2	July 1,2020 interest entry is passed as under:
	General Journal
	Year	Particulars	L.F	Debit ($)	Credit ($)
	By effective interest method
	2020
	1-Jul	Bond Interest Expense		29725
		Unamortised Bond Discount			2225
		Cash			27500
		(For paid semi-annual interest on 11% bonds for 6 months and amortization of discount for half year)
	By Straight Line method
	2020
	1-Jul	Bond Interest Expense		29549
		Unamortised Bond Discount			2049
		Cash			27500
		(For paid semi-annual interest on 11% bonds for 6 months and amortization of discount for half year)