The Tudor Company acquired $500,000 of Carr Corporation bonds for $487,706.69 on January 1, 2007....

Question

The Tudor Company acquired $500,000 of Carr Corporation bonds for $487,706.69 on January 1, 2007. 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, 2010.

Required
1. Prepare an investment interest revenue and discount amortization schedule using:
a. The straight-line method
b. The effective interest method
2. Prepare the July 1, 2009 journal entries to record the interest revenue under both methods.

David · Accepted Answer

1. 
Investment interest income is calculated as under: 
a. By Straight line method
A B C D E F 
Semiannual 
Interest 
Period 
Carrying 
Value at 
beginning 
of period 
Semiannual 
Interest 
Expense at 
12% to be 
recorded 
Semiannual 
Interest 
payment to 
bondholders 
Amortization 
of Bond 
Discount 
Unamortized 
Bond 
Discount at 
end of 
Period 
Carrying 
Value at 
end of 
period 
  
C+D 
5.5% of 
500,000 (B-C) (E-D) (A+D) 
0 
    
12,293 487,707 
1 487,707 29,549 27,500 2,049 10,244 489,756 
2 489,756 29,549 27,500 2,049 8,196 491,804 
3 491,804 29,549 27,500 2,049 6,147 493,853 
4 493,853 29,549 27,

The Tudor Company acquired $500,000 of Carr Corporation bonds for $487,706.69 on January 1, 2007. The bonds carry an 11% stated interest rate, pay interest semiannually on January 1 and July 1, were...

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