Question

With detailed explanation, please.

P 14-3 Straight-line and effective interest compared Page 821 QL014–2 On January 1, 2021, Bradley Recreational Products issued $100,000, 9%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $96,768 to yield an annual return of 10%. 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, 2023, by each of the two approaches. 4. Explain why the pattern of interest differs between the two methods. 5. Assuming the market rate is still 10%, what price would a second investor pay the first investor on June 30, 2023, for $10,000 of the bonds?

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and calculation. For detailed answer refer to the supporting sheet.

Answer 2 Part 1) Amortization Schduele Interest Cash interest Carrying Value of Discount expense Paid (carrying value 10%/2) Amortised Bond (100000*9%/2) 4 Date 5 January 1, 2021. 6 June 30, 2021. 7 December 31,2021. 8 June 30, 2022. 9 December 31,2022. 10 June 30, 2023. 11 December 31,2023. 96,768 4,838 $ 4,855 $ 4,873 $ 4,892 $ 4,911 $ 4,932 $ 4,953 $ 4,978 $ 4,500 $ 4,500 $ 4,500 $ 4,500 $ 4,500 $ 4,500 $ 4,500 $ 4,500 $ 338 $ 97,106 355 $ 97,461 373 $ 97,834 392 $ 98,226 411| $ 98,637 432 $ 99,069 453 $ 12 June 30, 2023. 99,522 13 December 31,2024. 478 $ 1,00,000 14

5 Part 2) Amortization Schduele by Straight Line Method Discount Cash interest Amortised Interest Carrying Value of Paid ((100000- Bond expense (100000*9%/2) Date 96768)/8) B January 1, 2021. June 30, 2021. o December 31,2021. 96,768 404 $ 4,500 $ 4,500 $ 4,500 $ 4,500 $ 4,500 $ 4,500 $ 4,500 $ 4,500 $ 4,904 $ 97,172 404 $ 404 $ 404 $ 404 $ 404 $ 404 $ 4,904 97,576 4,904 $ June 30, 2022. pDecember 31,2022. 97,980 4,904 $ 4,904 $ 4,904 $ 98,384 3 June 30, 2023. a December 31,2023. 98,788 2$ 99,192 5 June 30 , 2023. 4,904 $ 4,904 $ 99,596 5 December 31,2024. 404 $ 1,00,000

28 Part 3) 29 Effective interest method 30 Date Account Title Debit Credit 31 June 30 , 2023. Interest expense 4,911 32 Cash 4,500 33 Discount on Bond Payable 2$ 411 34 To record interest payment) 36 Straight Line Method 37 Date Account Title Debit Credit 38 June 30 , 2023. Interest expense 4,904 39 Cash 4,500.00 40 Discount on Bond Payable 2$ 404.00 To record interest payment) 41 43 Part 4) This is because in effective interest method discount is amortised based on the carrying value of the bond and in case of straight line method discount value per period is same because equal amount is amortised in every 14 period. 46 Part 5) 47 The second investor will pay for $ 10000o amount of bond 48 = 10000/100000 * carrying value of the bond 49 = 10000/100000 * 98788 50 =$ 9879 %3D 52 Thus the correct answer is $ 9879