Question

On January 1, 2018, NFB Visual Aids issued $900,000 of its 20-year, 10% bonds. The bonds were priced to yield 12%. 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 $768,000 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.
Record the issuance of bonds. Record the first interest payment. Record the second interest payment.The entry to adjust the bonds to their fair value for presentation in the December 31, 2018 balance sheet.

Answer 1

Solution:

Given data,

NFB visual Aids issued $900,000 of its 20 yeras

10% bonds were priced to yeld 12%

The fair value of the bonds was $768,000

From the given data we need to find the given requirements,

Answer 1-a : Price of the bonds at january 1, 2018:

Details	Calculations	Amount ($)
Interest	$45,000 * 15.0463 (notes)	$677,084
Principle	$900,000 * 0.0972 (notes)	$ 87,480
Price of bonds (present value)		$764,564

Working notes:

$900,000 * 5% = $45,000

Present value of ordinary annuity of $1: n= 40, i = 6% is 15.0463

Present value of $1 : n = 40, i = 6%, is 0.0972

Answer 1-b: Journal entries:

Date	Particulars	Debit $	Credit $
Jan 1, 2018	Cash dr	764,564
	Discount on bonds payable dr	135,436
	To bonds payable		900,000
	(Being bonds issued)
Jan 30, 2018	Interest expense dr (764,564 * 6%)	45,874
	To discount on bonds payable		874
	To Cash		45,000
	(Being interest paid)
Dec 31, 2018	Interest expense dr (764,564 + 874) * 6%	45,926
	To dicount on bonds payable		926
	To cash		45,000
	(Being interest paid)
Dec 31, 2018	Unrealizing holding loss dr (768,000 - 764564 - 874 - 926)	1,636
	To fair value adjustments		1,636
	(Being bonds adjusted to the fair value)