Question

On January 1, 2021, NFB Visual Aids issued $760,000 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, 2021, the fair value of the bonds was $636,000 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, 2021. 1-b to 4. Prepare the necessary Journal entries. 1. Record the issuance of bonds. 2. Record the first interest payment. 3. Record the second interest payment. 4. Record the entry to adjust the bonds to their fair value for presentation in the December 31, 2021 balance sheet.

Answer 1

1
	Face Value	$760,000 x 0.14205	$107,958
	Interest	$30,400 x 17.15909	$521,636
	Present value (price) of the bonds		$629,594
1	Date	Account Titles and Explanation	Debit	Credit
	Jan. 1, 2021	Cash	$629,594
		Discount on bonds Payable	$130,406
		Bonds Payable		$760,000
	Date	Cash Received	Interest Revenue	Discount Amortized	Carrying Amount of Bonds
	Jan. 1, 2021				$629,594
	June 30, 2021	$30,400	$31,480	$1,080	$630,674
	Dec 31, 2021	$30,400	$31,534	$1,134	$631,808
	June 30, 2022	$30,400	$31,590	$1,190	$632,998
	Dec 31, 2022	$30,400	$31,650	$1,250	$634,248
2	Date	Account Titles and Explanation	Debit	Credit
	June 30, 2021	Interest Expense	$31,480
		Discount on bonds Payable		$1,080
		Cash		$30,400
3	Date	Account Titles and Explanation	Debit	Credit
	Dec 31, 2021	Interest Expense	$31,534
		Discount on bonds Payable		$1,134
		Cash		$30,400
	Date	Account Titles and Explanation	Debit	Credit
4	Dec 31, 2021	Unrealized holding loss	$4,192
		Fair value adjustment		$4,192
		($636,000 - $631,808)