Question

National Orthopedics Co. issued 8% bonds, dated January 1, with a face amount of $750,000 on January 1, 2021. The bonds mature on December 31, 2024 (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, 2021. 2. Prepare the journal entry to record their issuance by National on January 1, 2021. 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, 2021. 5. Prepare the appropriate journal entries at maturity on December 31, 2024.

Answer 1

Semi annual cash interest = 750,000*8%*6/12 = 30,000
Price of bonds
n = 8
I = 5%
Cashflows		Amount	PVF	Present Value
Semi annual cash interest	30000	6.46321	193896.3
Maturity value		750000	0.67684	507630
Price of bonds				701526.3
Journal entry for issuance
S.no.	Accounts title and explanations		Debit $	Credit $
01.01.21	Cash account			701526
	Discount on bonds payable		48474
	Bonds payable				750000
	(for issuance of bonds)
Amort Chart:
Date	Cash int.	Int. expense	Discount	Unamortised	carrying
			amortize	Discount	value of bonds
01.01.21				48474	701526
30.06.21	30000	35076	5076	43398	706602
31.12.21	30000	35330	5330	38068	711932
30.06.22	30000	35597	5597	32471	717529
31.12.22	30000	35876	5876	26595	723405
30.06.23	30000	36170	6170	20424	729576
31.12.23	30000	36479	6479	13945	736055
30.06.24	30000	36803	6803	7143	742857
31.12.24	30000	37143	7143	0	750000
Journal entries
S.no.	Accounts title and explanations		Debit $	Credit $
30.06.21	Interest expense			35075
	Cash account				30000
	Discount on bonds payable			5076
	(for interest expense paid)
31.12.24	Bonds payable			750000
	Cash account				750000
	(for bonds redeemed)