Question

National Orthopedics Co. issued 9% bonds, dated January 1, with a face amount of $900,000 on January 1, 2018. The bonds mature on December 31, 2021 (4 years). For bonds of similar risk and maturity the market yield was 10%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:

1. Determine the price of the bonds at January 1, 2018.

2. Prepare the journal entry to record their issuance by National on January 1, 2018.

3. Prepare an amortization schedule that determines interest at the effective rate each period.

4. Prepare the journal entry to record interest on June 30, 2018.

5. Prepare the appropriate journal entries at maturity on December 31, 2021.

Answer 1

1)Price of bond=Present vaue of face value+Present value of annuity of coupon payments

=PVF(900,000, r=10/2%, n=4*2)+PVAF(40,500, r=10/2%, n=4*2)

=(900,000*0.67684) + (40,500*6.46321)

=609155.43+261760.117

=$870,915.54

2)

Date	Particulars	Debit($)	Credit($)
1 Jan 2018	Cash	870,915.54
	Discount on Bonds Payable	29,084.46
	To Bonds Payable		900,000.00
	(Being note receivable received)

3)

A	B	C	D	E	F	G
DATE	INT PAYMENT(FACE VAL*4%)	INTEREST EXPENSE(PREVIOUS BOOK VAL IN G*5%)	AMORTISATION(C-B)	BALANCE IN DISCOUNT(PREV VALUE-D)	FACE VALUE	BOOK VALUE(PREV VALUE+D)
Coupon Payment				29084	900000	870916
1	40500	43546	3046	26038	900000	873962
2	40500	43698	3198	22840	900000	877160
3	40500	43858	3358	19482	900000	880518
4	40500	44026	3526	15956	900000	884044
5	40500	44202	3702	12254	900000	887746
6	40500	44387	3887	8367	900000	891633
7	40500	44582	4082	4285	900000	895715
8	40500	44785	4285	0	900000	900000

4)

Date	Particulars	Debit($)	Credit($)
30 Jun 2018	Interest Expese	43,546
	To Discount on Bonds Payable		3,046
	To cash		40,500
	(Being payment of interest and amortisation of discount)

5)

Date	Particulars	Debit($)	Credit($)
31 Dec 2021	Interest Expese	44,786
	To Discount on Bonds Payable		4,286
	To cash		40,500
	(Being payment of interest and amortisation of discount)
31 Dec 2021	Bonds Payable	900,000
	To Cash		900,000
	(Being Bond paid on maturity)

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