Question

Problem 14-22 Determine bond price; record interest; report bonds at fair value [LO14-6]

On January 1, 2018, NFB Visual Aids issued $900,000 of its 20-year, 6% bonds. The bonds were priced to yield 8%. Interest is payable semiannually on June 30 and December 31. NFB Visual Aids records interest expense at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2018, the fair value of the bonds was $730,000 as determined by their market value in the over-the-counter market. (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-a. Determine the price of the bonds at January 1, 2018.
1-b to 4. Prepare the necessary Journal entries

its just journal entry and its 4 that what is mean

Answer 1

Answer

1.

Market interest rate = 8%

Market interest rate for a semiannual period = 8% / 2 = 4%

r = 0.04 (per semiannual period),   

n = 40 (semiannual periods)

Present value of principal

= $900,000 x Present value factor for a single payment (4%, 40 periods)

= $900,000 x 0.20828904455

= $187,460.14

Interest payment each semiannual period

= $900,000 x 3%

= $27,000

(Coupon rate for a semiannual period = 6% / 2 = 3 %.)

Present value of interest payments
   = Interest payment each semiannual period
          x Present value factor for an ordinary annuity (4%, 40 periods)

= $27,000 x 19.792773883426

= $534,404.89

Price of bonds
= Present value of principal + Present value of interest payments

= $187,460.14 + $534,404.89

=$721,865.03 or =$721,865

The bonds will be sold at $721,865

2.

I am assuming that there are 4 journal entries i.e. Of issue, Interest on June 30, Interest on December 31 and Fair value adjustment entry.

Date		Dr. $	Cr. $
Jan-1	Cash	721,865
	Discount on Bonds	178,135
	6% Bonds		900,000
	(Being bonds issued at discount)
Jun-30	Interest Expense (721,865 * 4%)	28,875
	Discount on Bonds		1,875
	Cash (900,000 * 6% * 6/12 months)		27,000
	(Being interest paid)
Dec-31	Interest Expense [(721,865 + 1,875) * 4%]	28,950
	Discount on Bonds		1,950
	Cash (900,000 * 6% * 6/12 months)		27,000
	(Being interest paid)
Dec-31	Unrealized loss	4,310
	Fair value adjustment		4,310
	(Being fair value of bond adjusted)

Note

New Book value = Bond issue price + Discount adjusted at interest time

= 721,865 + 1,875 + 1,950

New Book value = 725,690

Fair Value adjustment = Fair value – Book Value

= 730,000 – 725,690

Fair Value adjustment = $4,310