Question

Mercer Corporation acquired $400,000 of Park Company’s bonds on June 30, 2018, for $409,991.12. The bonds carry a 12% stated interest rate and pay interest semiannually on June 30 and December 31. The appropriate market interest rate is 11%, and the bonds are due June 30, 2021. Required: 1. Prepare an investment interest income and premium amortization schedule, using the: a. straight-line method b. effective interest method 2. Prepare journal entries to record the December 31, 2018, and December 31, 2020, interest receipts using both methods.

Answer 1

Answer:

I will start with question 2:

journal entry to record purchase of bonds

June 30, 2018, bonds purchased at a premium

Dr Investment in bonds 400,000

Dr Premium on investment in bonds 9,991.12

    Cr Cash 409,991.12

straight line amortization of bond premium:

December 31, 2018 = 1,665.19

June 30, 2019 = 1,665.19

December 31, 2019 = 1,665.18

June 30, 2020 = 1,665.19

December 31, 2020 = 1,665.19

June 30, 2021 = 1,665.18

December 31, 2018

Dr Cash 24,000

    Cr Interest revenue 22,334.81

    Cr Premium on investment in bonds 1,665.19

December 31, 2020

Dr Cash 24,000

    Cr Interest revenue 22,334.81

    Cr Premium on investment in bonds 1,665.19

     

amortization of bond premium using effective interest method:

December 31, 2018 = (409,991.12 x 0.055) - 24,000 = 1,450.49

June 30, 2019 = (408,540.63 x 0.055) - 24,000 = 1,530.27

December 31, 2019 = (407,010.36 x 0.055) - 24,000 = 1,614.43

June 30, 2020 = (405,395.93 x 0.055) - 24,000 = 1,703.22

December 31, 2020 = (403,692.71 x 0.055) - 24,000 = 1,796.90

June 30, 2021 = 1,895.81

December 31, 2018

Dr Cash 24,000

    Cr Interest revenue 22,549.51

    Cr Premium on investment in bonds 1,450.49

December 31, 2020

Dr Cash 24,000

    Cr Interest revenue 22,203.10

    Cr Premium on investment in bonds 1,796.90

1) I used an excel spreadsheet to prepare the amortization schedules: