Question

National Orthopedics Co. issued 11% bonds, dated January 1, with a face amount of $700,000 on January 1, 2018. The bonds mature on December 31, 2021 (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, 2018.
2. Prepare the journal entry to record their issuance by National on January 1, 2018.
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, 2018.
5. Prepare the appropriate journal entries at maturity on December 31, 2021.

Schedule table:

Prepare an amortization schedule that determines interest at the effective rate each period. (Round final answers to the nearest whole dollar.)

	Semiannual Interest Period-End Cash Interest Bond Interest Expense Discount Amortization Carrying Value 01/01/2018 06/30/2018 12/31/2018 06/30/2019 12/31/2019 06/30/2020 12/31/2020 06/30/2021 12/31/2021 Total

Answer 1

1) Bond Price Formula:

Bond Value = C/2 {[1-(1+(YTM/2))^-2t/(YTM/2)] + [F / (1+ (YTM/2))^2t]

B₀ = ? (Bond Price)
C = Coupon payment received = 11% * $700,000 = $77,000
F = Face value = $700,000
YTM = yield to maturity = 12% or 0.12
t = number of periods = 4 years * 2 = 8

Price of Bond = $77,000/2*{[1-(1+(0.12/2))^-8/(0.12/2)] + [$700,000 / (1+ (0.12/2))⁸]
=> ($38,500 * 6.209793811) + ($700,000 / 1.593848075)
= $678,265.72

2)

Date	Particular	Debit	Credit
01-Jan-18	Cash	$678,265.72
	Discount on Bonds Payable	$21,734.28
	Bonds Payable		$700,000.00

3)

Semiannual Interest Period-End	Cash Interest	Bond Interest Expense	Discount Amortization	Carrying Value
01/01/2018	-	-	-	700,000.00
06/30/2018	38,500.00	40,695.94	-2,195.94	678,265.72
12/31/2018	38,500.00	40,827.70	-2,327.70	680,461.66
06/30/2019	38,500.00	40,967.36	-2,467.36	682,789.36
12/31/2019	38,500.00	41,115.40	-2,615.40	685,256.73
06/30/2020	38,500.00	41,272.33	-2,772.33	687,872.13
12/31/2020	38,500.00	41,438.67	-2,938.67	690,644.46
06/30/2021	38,500.00	41,614.99	-3,114.99	693,583.13
12/31/2021	38,500.00	41,801.89	-3,301.89	696,698.11

4)

Date	Particular	Debit	Credit
30-Jun-18	Bond interest expense	40,695.94
	Discount on Bonds Payable		2,195.94
	Cash		38,500.00

5)

Date	Particular	Debit	Credit
31-Dec-21	Bond interest expense	41,801.89
	Discount on Bonds Payable		3,301.89
	Cash		38,500.00
	To record interest expense for the semi-annual period ending on 31 Dec 2021
31-Dec-21	Bonds Payable	700,000.00
	Cash		700,000.00
	To record payment of bond at maturity