Question

On January 1, 2018, Bradley Recreational Products issued $200,000, 11%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued at $193,790 to yield an annual return of 12%. (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, 2020, by each of the two approaches. 5. Assuming the market rate is still 12%, what price would a second investor pay the first investor on June 30, 2020, for $24,000 of the bonds?

Answer 1

Answer:

At June 30th, 2020 an investor will purchase the bonds at 197,327 which is the present value of the bond at the market rate.

June 30th entries:

interest expense 11,627.4 debit

discount on bonds payable 627.4 credit

cash 11000 credit

/effective method

interest expense 11,776.25 debit

discount on bonds payable 776.25 credit

cash 11000 credit

/straight-line method

the tables are attached to the answer.

Explanation:

effective method

procceds 193,790

face value 200,000

discount on bonds payable 6,210

bond rate 0.055 (11% annual / 2 payment per year)

market rate 0.06 (12% annual / 2 payment per year)

straight line:

6,210 / 8 (4 years and 2 payment per year) = 776,25‬