Question

National Orthopedics Co. Issued 7% bonds, dated January 1, with a face amount of $800,000 on January 1, 2021. The bonds mature on December 31, 2024 (4 years). For bonds of similar risk and maturity the market yield was 8%. Interest is paid semiannually on June 30 and December 31. (FV of $1. PV of $1, EVA of $1. PVA of $1. FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Determine the price of the bonds at January 1, 2021. 2. Prepare the journal entry to record their issuance by National on January 1, 2021. 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, 2021. 5. Prepare the appropriate journal entries at maturity on December 31, 2024.

Answer 1

Answer to Part 1 -

B = I/2*[PVIFA(K_d/2 ,_2n ) + M*[PVIF(K_d/2 ,_2n )]

B - value of the bond at t =0

I - annual interest paid = 7% i.e 3.5% for semi annually

n - no. of years to maturity (term of the bond) = 4years i.e 8 semi years

M - par/maturity value = 800000

K_d - required return on the bond = 8% i.e. 4% semi year

B₀ = 7%/2*800000*PVIFA(4% ,8) + 800000*[PVIF(4% ,8)]

= 28000*6.732745 + 800000*0.73069

= 188516.9 + 584552.2

= $ 773069

Answer to Part 2 -

Accounts Title Cash Discount on issue of bond To bond payable Debit Credit 773069 26931 800000

Answer to Part 3 -

national orthopedics period Ending Cash interest paid Period interest Discount Amortization Unamortized Discount Carrying Value (800000 - unamortized ($ 800000*3.5%) -AB C=B-A D = DO+C1 discount) 1/1/2021 26931.00 773069 6/30/2021 28000 30922.76 2922.76 24008.24 775992 12/31/2021 28000 31039.67 3039.67 20968.57 779031 6/30/2022 28000 31161.26 3161.26 17807.31 782193 12/31/2022 28000 31287.71 3287.71 14519.60 785480 6/30/2023 28000 31419.22 3419.22 11100.39 788900 12/31/2023 28000 31555.98 3555.98 7544.401 792456 6/30/2024 28000 31698.22 3698.22 3846.18) 796154 12/31/2024 28000 31846.15 3846.15 0.00 800000

Answer to Part 4 -

Accounts Title interest expense To Cash interest To Disocunt on bond payable Debit Credit 30922.76 28000 2922.76

Answer to Part 5 -

Accounts Title Bond payable To Cash Debit Credit 800000 800000

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