Question

1. National Comapny issued 7.5% bonds, dated January 1, with a face amount of $600,000 on January 1, 2017. The bonds mature on December 31, 2023. The market yield for bonds of similar risk and maturity was 5.5%. Interest is made semiannually on June 30 and December 31.

Required:

a. Determine the price of the bonds at January 1, 2017 (be certain to include all of the "given" information)

b. Prepare a bond amortization table using the effective interest method and make certain to obtain totals for the columns of Cash Interest Paid, Interest Expense, and Premium Amortization

c. Prepare the journal entry to record their issuance by National Company on January 1, 2017.

d. Prepare the journal entry recordin gthe first interest payment on June 30, 2017.

e. Prepare the journal entry recording the interest payment on December 31, 2017.

f. Prepare journal entries at maturity on December 31, 2023.

g. Prepare the journal entry to record the retirement of the bond at a call price of $640,000 on January 1, 2020.

h. Instead of retirement of the bond as described in "g" above, assume the bond was retired @108 call price on January 1, 2020.

Answer 1

n = 14
i= 2.75%
Cashflows			Amount	PVF	Present value
Semi annual interest (600000*7.50%*6/12)			22500	11.49101	258547.7
Principal			600000	0.683997	410398.2
Price of bonds					668946
Amort Chart
Period	Cash Interest	Interest	Premium	Unamortized	Carrying
		Expennse	Amortized	Premium	amount
01.01.17				68946	668946
30.06.17	22500	18396	4104	64842	664842
31.12.17	22500	18283	4217	60625	660625
30.06.18	22500	18167	4333	56292	656292
31.12.18	22500	18048	4452	51840	651840
30.06.19	22500	17926	4574	47266	647266
31.12.19	22500	17800	4700	42566	642566
30.06.20	22500	17671	4829	37736	637736
31.12.20	22500	17538	4962	32774	632774
30.06.21	22500	17401	5099	27675	627675
31.12.21	22500	17261	5239	22437	622437
30.06.22	22500	17117	5383	17054	617054
31.12.22	22500	16969	5531	11522	611522
30.06.23	22500	16817	5683	5839	605839
31.12.23	22500	16661	5839	0	600000
Journal entries:
Date	Accounts title and explanations				Debit $	Credit $
01.01.17	Cash account				668946
	Bonds payable					600000
	Premium on bonds payable					68946
30.06.17	Interest expenses				18396
	Premium on bonds payable				4104
	Cash account					22500
31.12.17	Interest expenses				18283
	Premium on bonds payable				4217
	Cash account					22500
31.12.23	Bonds payable				600000
	Cashh account					600000
31.12.20	Bonds payable				600000
	Premium on bonds payable				32774
	Loss on retirement of Bonds				7226
	Cash account					640000
31.12.20	Bonds payable				600000
	Premium on bonds payable				32774
	Loss on retirement of Bonds				15226
	Cash account		(600000*108%)			648000