Question

On January 1, 2021, NFB Visual Aids issued $820,000 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 $685,000 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. Req 1A Req 18 to 4 Determine the price of the bonds at January 1, 2021. (Round final answer to the nearest whole dollars.) Price of the bonds < Req 1A Req 1B to 4 >

Answer 1

The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is higher/lower as compared bond coupon rate then, the bonds were issued at a discount/premium. The Discount/premium is then amortised over the period of bond by using effective interest rate method. Under this method, interest expense is derived by multiplying the bond carrying value with the effective interest rate applicable when the bonds were issued. The difference between the interest expense and actual interest paid is the discount/(premium) which will be amortised.

Debit Credit $8,20,000 8.00% Ans 1 Face Value Stated Rate Coupon Payment Market Rate Maturity Period $6,79,299 $1,40,701 Semi Annual 10.00% $8,20,000 20 $33,965 Coupon payment frequency Coupon Rate consider for calculation [8%/2] Coupon Payment $1,165 $32,800 Semi Annual 4.00% $32,800 [$820000 x 4%] 5.00% 40 Date Account Title Ans 1b 01-01-2021 Cash Disocunt on Bond Payable Bond Payable (To record issuance of Bond at par value) Ans 2 30-06-2021 Interest Expense ($679299x5%] Disocunt on Bond Payable Cash (To record payment of interest on the bond) Ans 3 31-12-2021 Interest Expense [($679299+$33965-$32800)x5%] Disocunt on Bond Payable Cash (To record payment of interest on the bond) Ans 4 31-12-2021 Bond Payable Note (i) Unralised gain on Bond Payable (to record change in bond price) $34,023 $1,223 $32,800 Market Rate Consider for Calculation (10%/2] Period (20x2] Present Value of Coupon Payments Present Value of Annuity of $1 for period 40 Present Value of Coupon Payments (A) $3,313 17.15909 $5,62,818 ($32800 x 17.15909) $3,313 Note (0) Present Value of Redeemed value Present Value of $1 for period 40 Present Value of Maturity Value (B) 0.14205 $1,16,481 [$820000 x 0.14205] Unralised gain on Bond Payable Book Value Bond Payable ($679299+$1165+$1123] Less: Fair Value as on 31/12/2021 Unralised gain on Bond Payable $6,81,687 ($6,85,000) ($3,313) Present Value of Bond = Present Value of Coupon Payment + Present Value of Maturity Value Present Value of Bond ((A) + (B)] $6,79,299