Question

Tudor Company acquired $500,000 of Carr Corporation bonds for $487,706.69 on January 1, 2019. The bonds carry an 11% stated interest rate, pay interest semiannually on January 1 and July 1, were issued to yield 12%, and are due January 1, 2022.Required:
1. Prepare an investment interest income and discount amortization schedule using the:a. straight-line method
b. effective interest method
2. Prepare the July 1, 2021, journal entries to record the interest income under both methods.

Answer 1

Answer:

Debt securities Carr Corp.   500,000 debit

                Cash                                   487,706.69 credit

                Discount on D.S Carr Corp. 12,293.31 credit

--to record the purchase of the dbet securities--

Cash                                   27500.00 debit

Discount on D.S Carr Corp. 2048.88 debit

             interest revenue            29.548,88 credit

--to record under straitgh-line method --

Cash                                    27,500.00 debit

Discount on D.S Carr Corp  . 2,224.99 debit

             interest revenue            29,724.99  credit

--to record under effective rate method --

ATTACHED SCHEDULED

Explanation:

The difference between the face valeu and the actual price will be the discount or premium being discount, when lower and premium when higher.

500,000 - 487,706.69 = 12,293.31

Effective rate will calculate the interest revenue by multipling the carrying value by the market rate

and the amortization in the discount will be the difference with the actual cash proceeds

Straight-line will divide the discount over the total amount of payments due and do the same amount over time:

12,293.31 / 6 = 2048.885