Question

National Orthopedics Co. issued 8% bonds, dated January 1, with a face amount of $600,000 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. (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

1.Price of the bond =P.V of the principal payment + P.V of the interest payments

n= no of periods = 4 years * 2 semi annual periods = 8 no of periods.

Interest rate = 8% per annum,therefore semi- annual interest =8/2 =4%.

So interest payments=600000*4% =$24,000

Similarly market yield semi-annual = 12/2 = 6%

Price of the bond = Cash Flow /(1+r)^n + Cash Flow of interest *{1-(1+r)^-n}/r

=6,00,000/(1+0.06)^8 + 24,000*{1-(1+0.06)^-8}/0.06

=600000/1.5938 + 24000*(1-.6274)/0.06

=376,458.7778 + 149,040 = $ 525,498.7778 rounded off to $ 525,500

Note : We will discount using the market rate of interest.

2. Journal entry to record the issue of bond

Cash ..........................................Dr. $525,500

Discount on bonds .....................Dr. $ 74,500

Bonds payable..........................................Cr. $ 600,000

3. Amortization Schedule with interest at effective rate each period

Date	Cash paid (Semi-annual)	Interest expense (effective rate = 6%)	Discount amortized	Carrying amount of Bond
01-Jan-21				525500
30-Jun-21	24000	31530	7530	533030
31-Dec-21	24000	31981.8	7981.8	541011.8
30-Jun-22	24000	32460.708	8460.708	549472.508
31-Dec-22	24000	32968.35048	8968.35048	558440.8585
30-Jun-23	24000	33506.45151	9506.451509	567947.31
31-Dec-23	24000	34076.8386	10076.8386	578024.1486
30-Jun-24	24000	34681.44892	10681.44892	588705.5975
31-Dec-24	24000	35322.33585	11322.33585	600027.9334 approximately equal to the bond principal payment

Note : Interest expense = Carrying amount * 6% =525500*6% =31530 and so on

Discount amortized = Interest expense - Cash paid = 31530 -24000 = 7530 and so on

Carrying amount each time = Previous carrying amount - Discount amortized = 525500 - 7530 =517970 and so on…

4.Journal entry to record interest on June 30,2021

Interest Expense.........................................Dr.$ 31,530

  Cash................................................................Cr. $ 24,000

Discount on Bonds Payable............................Cr. $ 7,530

5.Journal entries at maturity

Bonds Payable.....................................Dr. $ 600,000

Cash...........................................Cr. $ 6,00,000

At the time of redemption or maturity of bond the premium or discount ( in this sum discount ) shoud have been already amortized so the entry is simply a debit to the bonds payable account and a credit to the cah account.

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