Question

National Orthopedics Co issued 8% bonds, cated January 1, with a face amount of $650,000 on January 1 2018. The bonds mature on December 31, 2021(4 years). For bonds of similars and maturity the market yield was 10%. Interest is paid semiannually on June 30 and December 31(FV of S1 PV of $1. FVA of $1. PVA of $1. FVAD of $1 and PVAD of $ (Use appropriate factors) from the tables provided.) Required: 1. Determine the price of the bonds at January 1, 2018 2. Prepare the journal entry to record the issuance by National on January 1, 2018 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, 2018 5. Prepare the appropriate journal entries at maturity on December 31, 2021

Answer 1

Requirement 1:

Interest = Face value x Stated rate = $650,000 x 8% x 6/12 = $26,000

Present value of the interest payments	$168,043
[$26,000 x 6.46321 present value annuity factor (10%, 4 years)]
Present value of the face value	$439,946
[$650,000 x 0.67684 present value factor (10%, 4 years)]
Price of the bond	$607,989

Requirement 2:

Date	Account title and Explanation	Debit	Credit
Jan 1,2018	Cash	$607,989
	Discount on bonds payable	$42,011
	Bonds payable		$650,000
	[To record issuance of bonds]

Requirement 3:

Amortization Schedule
Date	Cash paid	Interest expense	Discount amortized	Carrying value
1/1/2018				$607,989
6/30/2018	$26,000	$30,399	$4,399	$612,388
12/31/2018	$26,000	$30,619	$4,619	$617,008
6/30/2019	$26,000	$30,850	$4,850	$621,858
12/31/2019	$26,000	$31,093	$5,093	$626,951
6/30/2020	$26,000	$31,348	$5,348	$632,299
12/31/2020	$26,000	$31,615	$5,615	$637,914
6/30/2021	$26,000	$31,896	$5,896	$643,809
12/31/2021	$26,000	$32,190	$6,190	$650,000
	$208,000	$250,011	$42,011

Cash paid = $650,000 x 4% = $26,000

Interest expense = Preceding carrying value of the bonds x 5%

Discount amortized = Interest expense - Cash paid

Carrying value = Preceding carrying value - Discount amortized

Requirement 4:

Date	Account title and Explanation	Debit	Credit
June 30,2018	Interest expense	$30,399
	Discount on bonds payable		$4,399
	Cash		$26,000
	[To record payment of interest]

Requirement 5:

Date	Account title and Explanation	Debit	Credit
Dec 31,2021	Interest expense	$32,190
	Discount on bonds payable		$6,190
	Cash		$26,000
	[To record payment of interest]
Dec 31,2021	Notes payable	$650,000
	Cash		$650,000
	[To record payment of notes payable]