Question

On January 1, 2018, NFB Visual Aids issued $780,000 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 $650,000 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) (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.

Answer 1

1a price of the bonds at January 1, 2018 is:

Table value are based on:
n=40
i= 5%
Cash Flow	Table Value	Amount	Present Value
Par (maturity value)	0.14205	780,000	110,796
Interest (annuity)	17.15909	31,200	535,363
			646,159

Bond is issued at discount

Necessary Journal entries are as follows:

Year	Particulars	L.F	Debit ($)	Credit ($)
2018
Jan-01	Cash		646,159
	Discount on Bonds payable		133,841
	Bonds Payable			780,000
	(For bonds issued at discount)
Jun-30	Interest Expense (646,159*10%*6/12)		32,308
	Discount on Bonds payable			1,108
	Cash (780,000*8%*6/12)			31,200
	(For interest paid)
Jun-30	Interest Expense (646,159+1,108)*10%*6/12)		32,363
	Discount on Bonds payable			1,163
	Cash (780,000*8%*6/12)			31,200
	(For interest paid)