Question

National Orthopedics Co. issued 9% bonds, dated January 1, with a face amount of $850,000 on January 1, 2021. The bonds mature on December 31, 2024 (4 years). For bonds of similar risk and maturity the market yield was 10%. Interest is paid semiannually on June 30 and December 31. (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. 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

	principal				850,000
	interest paid on bonds 850,000*4.5%=				38250
	For Principal use PV of $1 table at 5% for 8 years
	for interest use PV of ordinary annuity table at 6% for 8 years
1)	Calculation of bonds issue price
	table values are based on
	n=	8
	i=	5.00%
	Cash flow		Amount	PV
	principal		850,000	575314		(850,000*.67684
	interest expense		38250	247218		(38250*6.46321)
	price of bonds			822532
2)	Date	Accoounting titles & Explanations				Debit	Credit
	1/1/2021	Cash				822532
		Discount on bonds payable				27,468
		Bonds payable					850,000
3)	interest	cash	bond	discount	carring
	period	interest	interest	amortizatioon	value
	end		expense
			5.00%
	1/1/2021				822532
	06/30/21	38250	41127	2877	825408
	12/31/21	38250	41270	3020	828429
	06/30/22	38250	41421	3171	831600
	12/31/22	38250	41580	3330	834930
	06/30/23	38250	41747	3497	838427
	12/31/23	38250	41921	3671	842098
	06/30/24	38250	42105	3855	845953
	12/31/24	38250	42297	4047	850000
	total	306000	333468	27468
4)	Date	Accoounting titles & Explanations				Debit	Credit
	30/6/2021	interest expense				41127
		Discount on bonds					2877
		cash					38250
	Date	Accoounting titles & Explanations				Debit	Credit
	12/31/21	interest expense				42297
		Discount on bonds					4047
		cash					38250
	31-Dec	bonds payable				850,000
		cash					850,000