Question

On January 1, 2018, Bradley Recreational Products issued $200,000, 9%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $193,537 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, 2020, 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, 2020, for $20,000 of the bonds?

Answer 1

Solution 1:

Bond Amortization Schedule - Bradely Recreation products - Effective Interest method
Period	Cash Paid	Interest Expense	Discount Amortized	Unamortized discount	Carrying Value
1-Jan-18				$6,463	$193,537
30-Jun-18	$9,000	$9,677	$677	$5,786	$194,214
31-Dec-18	$9,000	$9,711	$711	$5,075	$194,925
30-Jun-19	$9,000	$9,746	$746	$4,329	$195,671
31-Dec-19	$9,000	$9,784	$784	$3,546	$196,454
30-Jun-20	$9,000	$9,823	$823	$2,723	$197,277
31-Dec-20	$9,000	$9,864	$864	$1,859	$198,141
30-Jun-21	$9,000	$9,907	$907	$952	$199,048
31-Dec-21	$9,000	$9,952	$952	$0	$200,000

Solution 2:

Bond Amortization Schedule - Bradely Recreation products - Straight line method
Period	Cash Paid	Interest Expense	Discount Amortized	Unamortized discount	Carrying Value
1-Jan-18				$6,463	$193,537
30-Jun-18	$9,000	$9,808	$808	$5,655	$194,345
31-Dec-18	$9,000	$9,808	$808	$4,847	$195,153
30-Jun-19	$9,000	$9,808	$808	$4,039	$195,961
31-Dec-19	$9,000	$9,808	$808	$3,232	$196,769
30-Jun-20	$9,000	$9,808	$808	$2,424	$197,576
31-Dec-20	$9,000	$9,808	$808	$1,616	$198,384
30-Jun-21	$9,000	$9,808	$808	$808	$199,192
31-Dec-21	$9,000	$9,808	$808	$0	$200,000

Solution 3:

Journal Entries - Bradely Recreation products
Date	Particulars	Debit	Credit
	Effective interest method:
30-Jun-20	Interest Expense Dr	$9,823.00
	To Cash		$9,000.00
	To Discount on bond payable		$823.00
	(Being interest paid and discount amortized)
	Straight Line Method:
30-Jun-20	Interest Expense Dr	$9,808.00
	To Cash		$9,000.00
	To Discount on bond payable		$808.00
	(Being interest paid and discount amortized)

Solution 5:

If market rate is still 10% then price would be paid by second investor to first investor on June 30, 2020 =

Carrying value of bond on June 30, 2020 under effective interest method * Face value of bond purchase / Total face value of bond

$197,277 * $20,000 / $200,000 = $19,727.70