Question

On January 1, 2021, Bradley Recreational Products issued $120,000, 8%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $112,244 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.

Required 1 Required 2 Required 3 Required 5 Prepare an amortization schedule that determines interest at the effective i Payment Number Cash Payment Effective Interest Increase in Balance Carrying Value Totals

3. Prepare the journal entries to record interest expense on June 30, 2023, 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, 2023, for $12,000 of the bonds?

Answer 1

Requirement 1:

Effective interest method:

Payment Number	Cash Payment	Effective Interest	Increase in Balance	Carrying Value
				$112,244
1	$4,800	$5,612	$812	$113,056
2	$4,800	$5,653	$853	$113,909
3	$4,800	$5,695	$895	$114,804
4	$4,800	$5,740	$940	$115,745
5	$4,800	$5,787	$987	$116,732
6	$4,800	$5,837	$1,037	$117,769
7	$4,800	$5,888	$1,088	$118,857
8	$4,800	$5,943	$1,143	$120,000
Totals	$38,400	$46,156	$7,756

Cash payment = $120,000 x 4% = $4,800

Effective interest = Preceding carrying value x 5%

Increase in balance = Effective interest - Cash payment

Carrying value = Preceding carrying value + Increase in balance

Requirement 2:

Straight-line

Payment Number	Cash Payment	Recorded Interest	Increase in Balance	Carrying Value
				$112,244
1	$4,800	$5,770	$969.50	$113,214
2	$4,800	$5,770	$969.50	$114,183
3	$4,800	$5,770	$969.50	$115,153
4	$4,800	$5,770	$969.50	$116,122
5	$4,800	$5,770	$969.50	$117,092
6	$4,800	$5,770	$969.50	$118,061
7	$4,800	$5,770	$969.50	$119,031
8	$4,800	$5,770	$969.50	$120,000
Totals	$38,400	$46,156	$7,756

Cash payment = $120,000 x 4% = $5,600

Increase in balance = [$120,000-$112,244] ÷ 8 payments = $969.50

Effective interest = Cash payment + Increase in balance

Carrying value = Preceding carrying value + Increase in balance

Requirement 3:

Effective-interest

Date	Account title and Explanation	Debit	Credit
June 30,2023	Interest expense	$5,787
	Discount on bonds payable		$987
	Cash		$4,800
	[To record payment of interest]

Requirement 4:

Date	Account title and Explanation	Debit	Credit
June 30,2023	Interest expense	$5,770
	Discount on bonds payable		$970
	Cash		$4,800
	[To record payment of interest]

Requirement 5:

Carrying value of $120,00 on June 30,2023 is $116,732

So, Carrying value of $12,000 on June 30,2023 is $11,673

Thus, price of the bonds of $12,000 on June 30,2023 is $11,673