Question

Nordic Company issued bonds with the following provisions:

Maturity value: $60,000,000.

Interest: 7.9 percent per annum payable semi-annually each June 30 and December 31.

Terms: Bonds dated January 1, 2017, due five years from that date.

The company’s fiscal year ends on December 31. The bonds were sold on January 1, 2017, at a yield of 8 percent.

Required:
1.	Compute the issue (sale) price of the bonds. (Round time value factor to 4 decimal places. Round the final answer to the nearest whole dollar.)
	2. Prepare the journal entry to record the issuance of the bonds. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round the final answers to the nearest whole dollar.) 3. Prepare the journal entries at the following dates: June 30, 2017; December 31, 2017; and June 30, 2018. Use the effective-interest method to amortize bond discount or premium. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round the final answers to the nearest whole dollar.) 4. How much interest expense would be reported on the statement of earnings for 2017? (Round intermediate and final answer to the nearest whole dollar.)

Answer 1

(a)-The issue (sale) price of the bond

The issue (sale) price of the bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Par Value of the bond = $60,000,000

Semi-annual coupon amount = $2,370,000 [$60,000,000 x 7.90% x ½]

Semi-annual Yield to Maturity of the Bond = 4.00% [8.00% x ½]

Maturity Period = 10 Years [5 Years x 2]

Therefore, the Issue Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $2,370,000[PVIFA 4.00%, 10 Years] + $60,000,000[PVIF 4.00%, 10 Years]

= [$2,370,000 x 8.1109] + [$60,000,000 x 0.6756]

= $19,222,833 + $40,536,000

= $59,758,833

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.  

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.  

(b)-The journal entry to record the issuance of the bonds

Date	Accounts Tittles and explanations	Debit ($)	Credit ($)
Jan 01, 2017	Cash A/c	59,758,833
	Discount on Bond Payable A/c	241,167
	To Bond Payable A/c		60,000,000
	[The journal entry for the issuance of the bond if the bonds are issued at 96]

(c)-The journal entries to record the interest payment & amortization of discount by using the effective-interest method

Effective interest amortization table for the bonds first three semi-annual period

Semi-annual interest period	Cash Interest Paid	Bond Interest Expense	Discount amortization	Unamortized discount	Carrying Value
Jan 01, 2017	-	-	-	2,41,167	5,97,58,833
June 30, 2017	23,70,000	23,90,353	20,353	2,20,814	5,97,79,186
Dec 31, 2017	23,70,000	23,91,167	21,167	1,99,646	5,98,00,354
June 31, 2018	23,70,000	23,92,014	22,014	1,77,632	5,98,22,368

Journal entry to record the interest payment on June 30, 2017

Accounts Tittles and explanations	Debit ($)	Credit ($)
Interest Expenses A/c	2,390,353
To Discount on Bond Payable A/c		20,353
To Cash A/c		2,370,000

Journal entry to record the interest payment on December 31, 2017

Accounts Tittles and explanations	Debit ($)	Credit ($)
Interest Expenses A/c	2,391,167
To Discount on Bond Payable A/c		21,167
To Cash A/c		2,370,000

Journal entry to record the interest payment on June 30, 2018

Accounts Tittles and explanations	Debit ($)	Credit ($)
Interest Expenses A/c	2,392,014
To Discount on Bond Payable A/c		22,014
To Cash A/c		2,370,000