Question

On January 1, 2021, NFB Visual Aids issued $800,000 of its 20-year, 6% bonds. The bonds were priced to yield 8%. 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 $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, 2021. 1-b to 4. Prepare the necessary Journal entries. Complete this question by entering your answers in the tabs below. Reg 1A Reg 13 to 4 Determine the price of the bonds at January 1, 2021. (Round final answer to the nearest whole dollars.) Price of the bonds

Answer 1

Solution

NBF Visual Aid Inc

1. Determination of the price of the bonds at January 1, 2021:

Computations:

Issue price of bond = present value of bond + present value of interest payments

Present value of bond –

Maturity value = $800,000

Semi-annual periods, n = 20 x 2 = 40

Coupon rate = 6%

Market yield rate = 8%

Effective interest rate for semi-annual period = 8% x ½ = 4%

Present value of bond = maturity value x (P/F, 4%, 40)

= $800,000 x (P/F, 4%, 40)

= 800,000 x 0.2083 = $166,640

Present value of interest payments –

Semi-annual interest payments = 800,000 x 6% x 6/12 = $24,000

Present value of interest payments = 24,000 x (P/A, 4%, 40)

= 24,000 x 19.793 = $475,032

Issue price of bond = $166,640 + $475,032 = $641,672

Bond Issue Price at January 1, 2021 = $641,672

Since, the issue price of bond is lower than the maturity value, the bond is issued at discount.

Discount on bonds payable = $800,000 – 641,672 = $158,328

Journal Entries:

Date	Account Titles and Explanation	Debit	Credit
Jan 1, 2021	Cash	$641,672
	Discount on Bonds Payable	$158,328
	Bonds Payable		$800,000
	(To record issue of bonds)
June 30, 2021	Interest Expense	$25,667
	Discount on Bonds Payable		$1,667
	Cash		$24,000
	(To record semi-annual interest payment)
Dec 31, 2021	Interest Expense	$25,734
	Discount on Bonds Payable		$1,734
	Cash		$24,000
	(To record semi-annual interest payment)
Dec 31, 2021	Unrealized Loss on Book Value	$4,927
	Fair Value Adjustment		$4,927
	(To record bond adjustment to fair value)

Notes:

Interest expense, June 30, 2021-

= 641,672 x 4% = $25,667

Discount on bond amortization = 25,667 – 24,000 = $1,667

Book value of bond = 641,672 + 1,667 = $643,339

Interest expense, December 31, 2021 –

= 643,339 x 4% = $25,734

Discount on bond amortization = 25,734 – 24,000 = $1,734

Book value of bond = 643,339 + 1,734 = $645,073

Adjustment of bond to fair value:

Book value of bond at December 31, 2021 –

Issue price = $641,672

Add: discount amortization, June 30, 2021 = $1,667

Add: discount amortization, December 31, 2021 = $1,734

Book value at December 31, 2021 = 645,073

Less: Fair value at December 31, 2021 = $650,000

Fair value adjustment = $4,927