Beaver Inc. has issued two types of debt on January 1, 2012, the start of the co

Question

Beaver Inc. has issued two types of debt on January 1, 2012, the start of the company’s fiscal year.

1) $20 Million par of 10 year, zero-coupon bonds at a price to yield 12% per year.
2) $10 million, 10-year, 10% unsecured bonds, interest payable semi-annually on July 1 and January 1 to yield 12%.

(a). Prepare Bond Amortization Schedules for both bonds using Straight-line and Effective Interest Method.
(b). Prepare Journal entries for both bonds for the first three years using Effective Interest Method.

Explanation / Answer

Answer a:

Amortization of Discount under Effective Interest rate:-

10% Unsecured Bonds:

12% Zero Coupon Bond:

Amortization of Interest/Discount under Straight Line:-

10 % Unsecured Bond:

12% Zero Coupon Bond:

Answer b:

Present Value Face Value                                             3,118,047.27 =10000000/(1.06)^20 Interest                                             5,734,960.61 =500000*1- (1+0.06)^-20    /0.06 Total                                             8,853,007.88 Discount (10,000,000 - Total PV)                                             1,146,992.12

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