On January 1, 2016, Bradley Recreational Products issued $170,000, 8%, four-year
ID: 2481484 • Letter: O
Question
On January 1, 2016, Bradley Recreational Products issued $170,000, 8%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $159,013 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, 2018, by each of the two approaches. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 5. Assuming the market rate is still 10%, what price would a second investor pay the first investor on June 30, 2018, for $17,000 of the bonds?
Explanation / Answer
Solution:
Par Value of the bonds = $170,000
Coupon Interest Rate = 8% annually or 4% semi annually
Yield Return (market return) = 10% per annum or 5% semi annually
Semi Annual Coupon Interest = $170,000 x 4% = $6,800
Issue Price of the bonds = $159,013
Since issue price is less than par value, bonds are issued at discount.
Discount on Bonds Payable = $170,000 - $159,013 = $10,987
1) Amortization schedule that determines interest at the effective interest rate
Payment intervals
Date
Bond Interest Payable (Par Value of the bonds x Coupon Rate semi annual)
Bond Interest Expenses (Beginning Book Value @ effective market rate 5% semi annually)
Amortization of Discount on bonds payable (Interest Expenses - Interest Payable)
Balance of Unamortized Discount on Bonds Payable
Par Value of Bonds Payable
Book Value (Par Value - Balance of Unamortized Bond Discount)
0
Jan 1, 2016
$10,987
$170,000
$159,013
1
June 30, 2016
$6,800
$7,951
$1,151
$9,836
$170,000
$160,164
2
Dec 31, 2016
$6,800
$8,008
$1,208
$8,628
$170,000
$161,372
3
June 30, 2017
$6,800
$8,069
$1,269
$7,360
$170,000
$162,640
4
Dec 31, 2017
$6,800
$8,132
$1,332
$6,028
$170,000
$163,972
5
June 30, 2018
$6,800
$8,199
$1,399
$4,629
$170,000
$165,371
6
Dec 31, 2018
$6,800
$8,269
$1,469
$3,160
$170,000
$166,840
7
June 30, 2019
$6,800
$8,342
$1,542
$1,618
$170,000
$168,382
8
Dec 31, 2019
$6,800
$8,419
$1,619
($1)
$170,000
$170,001
Total:
$54,400
$65,388
$10,988
2) amortization schedule by the straight-line method
Payment intervals
Date
Bond Interest Payable (Par Value of the bonds x Coupon Rate semi annual)
Bond Interest Expenses (Interest Payable + Amortized Discount on bonds payable)
Amortization of Discount on bonds payable (Interest Expenses - Interest Payable)
Balance of Unamortized Discount on Bonds Payable
Par Value of Bonds Payable
Book Value (Par Value - Balance of Unamortized Bond Discount)
0
Jan 1, 2016
$10,987
$170,000
$159,013
1
June 30, 2016
$6,800
$8,173
$1,373
$9,614
$170,000
$160,386
2
Dec 31, 2016
$6,800
$8,173
$1,373
$8,240
$170,000
$161,760
3
June 30, 2017
$6,800
$8,173
$1,373
$6,867
$170,000
$163,133
4
Dec 31, 2017
$6,800
$8,173
$1,373
$5,494
$170,000
$164,507
5
June 30, 2018
$6,800
$8,173
$1,373
$4,120
$170,000
$165,880
6
Dec 31, 2018
$6,800
$8,173
$1,373
$2,747
$170,000
$167,253
7
June 30, 2019
$6,800
$8,173
$1,373
$1,373
$170,000
$168,627
8
Dec 31, 2019
$6,800
$8,173
$1,373
$0
$170,000
$170,000
Total:
$54,400
$65,387
$10,987
3) Effective Interest Approach
Date
Account Title and Explanation
Debit
Credit
June 30, 2018
Interest Expenses Dr
$8,199
To Discount on Bonds Payable
$1,399
To Interest Payable
$6,800
(Being Interest Expenses recorded)
Straight line approach
Date
Account Title and Explanation
Debit
Credit
June 30, 2018
Interest Expenses Dr
$8,173
To Discount on Bonds Payable
$1,373
To Interest Payable
$6,800
(Being Interest Expenses recorded)
Please ask separate question for rest part....
Payment intervals
Date
Bond Interest Payable (Par Value of the bonds x Coupon Rate semi annual)
Bond Interest Expenses (Beginning Book Value @ effective market rate 5% semi annually)
Amortization of Discount on bonds payable (Interest Expenses - Interest Payable)
Balance of Unamortized Discount on Bonds Payable
Par Value of Bonds Payable
Book Value (Par Value - Balance of Unamortized Bond Discount)
0
Jan 1, 2016
$10,987
$170,000
$159,013
1
June 30, 2016
$6,800
$7,951
$1,151
$9,836
$170,000
$160,164
2
Dec 31, 2016
$6,800
$8,008
$1,208
$8,628
$170,000
$161,372
3
June 30, 2017
$6,800
$8,069
$1,269
$7,360
$170,000
$162,640
4
Dec 31, 2017
$6,800
$8,132
$1,332
$6,028
$170,000
$163,972
5
June 30, 2018
$6,800
$8,199
$1,399
$4,629
$170,000
$165,371
6
Dec 31, 2018
$6,800
$8,269
$1,469
$3,160
$170,000
$166,840
7
June 30, 2019
$6,800
$8,342
$1,542
$1,618
$170,000
$168,382
8
Dec 31, 2019
$6,800
$8,419
$1,619
($1)
$170,000
$170,001
Total:
$54,400
$65,388
$10,988
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