Question

# On January 1, 2018, Bradley Recreational Products issued \$200,000, 9%, four-year bonds. Interest is paid semiannually...

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?

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

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