Question

On January 1, 2018, 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. 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 10%, what price would a second investor pay the first investor on June 30, 2020, for $12,000 of the bonds

Answer 1

Answer:

Answer is explained in the explanation section below.

Explanation:

Part 1:

Effective Interest Method:

Payment  Cash Payment  Effective Interest  Increase 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                    

Calculations:

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

Solution to part 2:

Similarly, we will be doing the part 2. Since, it is difficult to put here all the entries of the table. So, I have attached the tabulated part of the solution of part 2 in the attachment. Please refer to it.

Straight Line Method: Please refer to the attachment named Straight Line

Calculations used in the solution of part 2 are:

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

Solution to Part 3:

In this we have to prepare the journal entries by each of the two approaches done above. So, for your ease, I have tabulated it and attached in the attachment below. Please refer to attachment named as Effective Interest Method Solution to part 3 and Straight Line method Solution to part 3:

Solution to part 5:

As, Carrying value of $12000 on June 30,2020 is $116,732

 Thus, price of the bonds of $12,000 on June 30,2020 is $11,673