Question

National Orthopedics Co. issued 8% bonds, dated January 1, with a face amount of $600,000 on January 1, 2016. The bonds mature on December 31, 2019 (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, 2016. 2. Prepare the journal entry to record their issuance by National on January 1, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 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, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 5. Prepare the appropriate journal entries at maturity on December 31, 2019. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

		Requirement 1			Requirement 3
		Calulcation for determination of price of bonds			Amortization schedule based on effective Interest method
		A	B	C=A*B	D=I*6%	E=D-A	G=Previous G-E	H	I=H-G
	Year	Cash Outflow	PVIF@12%	Present value of future cash flow	Interest Expense	Amortisation of Bond discount	Balance in Bond discount	Bonds Payable Account	Book Value of Bonds
	01-01-2016	-600000	1				74517.53	600000	525482.47
	30-06-2016	24000	0.9433962	22641.51	31528.948	7528.948456	66988.58	600000	533011.42
	31-12-2016	24000	0.8899964	21359.91	31980.685	7980.685363	59007.89	600000	540992.11
	30-06-2017	24000	0.8396193	20150.86	32459.526	8459.526485	50548.37	600000	549451.63
	31-12-2017	24000	0.7920937	19010.25	32967.098	8967.098074	41581.27	600000	558418.73
	30-06-2018	24000	0.7472582	17934.2	33505.124	9505.123959	32076.14	600000	567923.86
	31-12-2018	24000	0.7049605	16919.05	34075.431	10075.4314	22000.71	600000	577999.29
	30-06-2019	24000	0.6650571	15961.37	34679.957	10679.95728	11320.75	600000	588679.25
	31-12-2019	24000	0.6274124	15057.9	35320.755	11320.75472	0.00	600000	600000.00
	31-12-2019	600000	0.6274124	376447.4
	The Price of the Bonds			525482.5
	Date	Account Title & Explanation				Debit	Credit
						Amount in $	Amount in $
Requirement 2
	January 1, 2016	Cash				525482.47
		Discount on Bonds Payable				74517.53
			Bonds payable				600000.00
		To record the issuance of Bonds
Requirement 4
	June 30, 2016	Interest Expense				31528.95
			Cash				24000.00
			Discount on Bonds Payable				7528.95	=	From Table
		To record the Interest expense for the period
Requirement 5
	December 31, 2019	Interest Expense				35320.75
			Cash				24000.00
			Discount on Bonds Payable				11320.75
		Bonds Payable				600000.00
			Cash				600000.00
		To record the Interest expense for the period and retirement of bonds