Question

EXCEL (Effective-Interest versus Straight-Line Bond Amortization) On January 1, 2017, Phantom Company

acquires \(200,000 of Spiderman Products, Inc., 9% bonds at a price of \)185,589. Interest is received on January 1 of each year, and

the bonds mature on January 1, 2020. The investment will provide Phantom Company a 12% yield. The bonds are classified as

held-to-maturity.

Instructions

(a) Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the straight-line method.

(b) Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the effective-interest method.

c) Prepare the journal entry for the interest revenue and discount amortization under the straight-line method at

December 31, 2018.

(d) Prepare the journal entry for the interest revenue and discount amortization under the effective-interest method at

December 31, 2018.

Short answer

Interest revenue according to the straight-line method is $22,804.

Interest revenue according to the effective-interest method is $22,271

Step-by-step solution

Bond amortization according to the straight-line method

Schedule of Interest Revenue and Bond Discount Amortization Straight-line Method

9% Bond Purchased to Yield 12%

Date	Cash Received	Interest Revenue	Discount Amortization	Carrying Amount
January 1, 2018				$185,589
December 31, 2018	$18,000	$22,804	$4,804	$190,393
December 31, 2019	$18,000	$22,804	$4,804	$195,197
December 31, 2020	$18,000	$22,804	$4,804	$200,000

Bond amortization according to the effective interest method

Schedule of Interest Revenue and Bond Discount Amortization Effective Interest Method

9% Bond Purchased to Yield 12%

Date	Cash Received	Interest Revenue	Discount Amortization	Carrying Amount
January 1, 2018				$185,589
December 31, 2018	$18,000	$22,271	$4,271	$189,860
December 31, 2019	$18,000	$22,783	$4,783	$194,643
December 31, 2020	$18,000	$23,357	$5,357	$200,000

Interest Revenue entry according to the straight-line method

Date	Description	Debit	Credit
December 31, 2018	Cash	$18,000
	Discount Amortization	$4,804
	Interest Revenue		$22,804
	Being entry of the interest revenue

Interest revenue entry according to effective interest method

Date	Description	Debit	Credit
December 31, 2018	Cash	$18,000
	Discount Amortization	$4,271
	Interest Revenue		$22,271
	Being entry of the interest revenue