Beaver Inc. has issued two types of debt on January 1, 2012, the start of the co
ID: 2455453 • Letter: B
Question
Beaver Inc. has issued two types of debt on January 1, 2012, the start of the company’s fiscal year.
1) $20 Million par of 10 year, zero-coupon bonds at a price to yield 12% per year.
2) $10 million, 10-year, 10% unsecured bonds, interest payable semi-annually on July 1 and January 1 to yield 12%.
(a). Prepare Bond Amortization Schedules for both bonds using Straight-line and Effective Interest Method.
(b). Prepare Journal entries for both bonds for the first three years using Effective Interest Method.
Explanation / Answer
Answer a:
Amortization of Discount under Effective Interest rate:-
10% Unsecured Bonds:
12% Zero Coupon Bond:
Amortization of Interest/Discount under Straight Line:-
10 % Unsecured Bond:
12% Zero Coupon Bond:
Answer b:
Present Value Face Value 3,118,047.27 =10000000/(1.06)^20 Interest 5,734,960.61 =500000*1- (1+0.06)^-20 /0.06 Total 8,853,007.88 Discount (10,000,000 - Total PV) 1,146,992.12