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AccountingIntermediate Accounting: Reporting And Analysis3rd Edition

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Chapter 13, Problem 4P
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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
370 views

Bond Investment Premium Amortization Schedule Mercer Corporation acquired $400,000 of Park Company’s bonds on June 30, 2019, for $409,991.12. The bonds carry a 12% stated interest rate and pay interest semi-annually on June 30 and December 31. The appropriate market interest rate is 11%, and the bonds are due June 30, 2022.

Required:

  1. 1. Prepare an investment interest income and premium amortization schedule, using the:
    1. a. straight-line method
    2. b. effective interest method
  2. 2. Prepare journal entries to record the December 31, 2019, and December 31, 2021, interest receipts using both methods.

1.

To determine

Prepare an investment interest income and premium amortization schedule using the:

(a) Straight-line method

(b) Effective interest method

Explanation

Effective interest amortization method: The amortization method which applies the market rate of interest to calculate the interest and the amortization of bond discount or premium for a particular period of time is known as effective interest amortization model.

Straight-line bond amortization:

The method of bond amortization by distributing the bond discount amount over the interest period equally is known as straight-line amortization of bond.

(a) Prepare an investment interest income and premium amortization schedule using the straight line method:

Corporation M
Bond investment interest income and Premium amortization Schedule (Partial)
Straight line method
DateCash (Debit) (a)Investment in debt securities (Debit) (b)Interest income (Credit) (c)Carrying value of debt securities (d)
06/30/2019   409,991.12
12/31/2019 24,000.00 1,665.19 22,334.81 408,325.93
06/30/202024,000.00 1,665.19 22,334.81 406,660.74
12/31/202024,000.00 1,665.19 22,334.81 404,995.55
06/30/202124,000.00 1,665.19 22,334.81 403,330.36
12/31/202124,000.00 1,665.19 22,334.81 401,665.17
06/30/202224,000.00 1,665.17 2,334.83 400,000.00

Table (1)

Working note (1):

Calculate the amount of cash:

Cash (a) = $400,000×12%×6 months12 months=$24,000  (12% is the interest rate)

Working note (2):

Calculate the amount of investment in debt securities:

Investment in debt securities(b)=Discount6 semiannum=$9,991.126=$1,665.19

Working note (3):

Calculate the amount of interest income:

Interest income=Cash−Amount of investment made in debt securities

Working note (4):

Calculate the amount of carrying value of the securities:

Carrying value of debt securities= [Previous carrying value−Investment in debt securities]

Note: The difference in the amount of $0

2.

To determine

Record the journal entries for the interest income under both methods in the books of Corporation M for the year 2019 and 2021.

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