Question

National Orthopedics Co. issued 9% bonds, dated January 1, with a face amount of $400,000 on January 1, 2021. The bonds mature on December 31, 2024 (4 years). For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31.

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

Answer:

principal				400000
	interest paid on bonds 400000*4.5%=	18000
	For Principal use PV of $1 table at 6% for 8 years
	for interest use PV of ordinary annuity table at 6% for 8 years
1)	Calculation of bonds issue price
	table values are based on
	n=	8
	i=	6%
	Cash flow		Amount	PV
	principal		400000	250964		(400000*0.62741
	interest expense	18000	111776		(18000*6.2098)
	price of bonds		362740
2)	Date	Accoounting titles & Explanations	Debit	Credit
	1/1/2021	Cash				362740
		Discount on bonds payable		37260
		Bonds payable				400000
3)	interest	cash	bond	discount	carring
	period	interest	interest	amortizatioon	value
	end		expense
			6%
	1/1/2021				362740
	06/30/21	18000	21764	3764	366504
	12/31/21	18000	21990	3990	370494
	06/30/22	18000	22230	4230	374724
	12/31/22	18000	22483	4483	379207
	06/30/23	18000	22752	4752	383959
	12/31/23	18000	23038	5038	388997
	06/30/24	18000	23340	5340	394337
	12/31/24	18000	23663	5663	400000
	total	144000	181260	37260
4)	Date	Accoounting titles & Explanations	Debit	Credit
	30/6/2021	interest expense			21764
		Discount on bonds				3764
		cash					18000
	Date	Accoounting titles & Explanations	Debit	Credit
	12/31/21	interest expense			23663
		Discount on bonds				5663
		cash					18000
	31-Dec	bonds payable			400000
		cash					400000