Question

On January 1, 2018, NFB Visual Aids issued $740,000 of its 20-year, 8% bonds. The bonds were priced to yield 10%. 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 $620,000 as determined by their market value in the over-the-counter market. General (risk-free) interest rates did not change during 2021. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
Required:

1-a. Determine the price of the bonds at January 1, 2018.
1-b to 4. Prepare the necessary Journal entries.

Answer 1

PRICE OF BONDS :
INTEREST	29600*17.1591(w.n)	507909
PRINCIPAL	740000*0.142(w.n)	105080
PRICE OF BONDS (PRESENT VALUE)		612989
W.N
740000*4%	29600
Present value of ordinary annuity of $1;n=40 ;i=5% is 17.1591
Present value of $1; n=40; i=5% is 0.142

JOURNAL ENTRIES
date	Particulars	debit	Credit
Jan 1, 18	cash	612989
	Discount on bonds payable	127011
	Bonds payable		740000
	(being bonds issued)
Jun 30, 18	Interest expense	30650
	Discount on bonds payable		1050
	cash		29600
	(being interest paid)
	612989*5% = 30650
Dec 31, 18	Interest expense	30702
	Discount on bonds payable		1102
	cash		29600
	(being interest paid)
	(612989+1050)*5% = 30702
Dec 31, 18	Unrealizing holding loss	4859
	Fair value adjustments		4858
	(being bonds adjusted to the fair value
	(620000-612989-1050-1102