Question

On January 1, 2021, NFB Visual Aids issued $850,000 of its 20-year, 10% bonds. The bonds were priced to yield 12%. 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 $725,000 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.

Answer 1

NFB Requirement la Requirement 1b to 4 Price of the bonds 722106 639467 Interest $ 42,500 x 15.04629 * Principal $ 850,000 0.097222 ** Present value (price) of the bonds 82639 722106 Journal Enteries Date Particulars Debit in $ Credit in $ 30.6.2021 Interest expense 43326 Discount on bonds payable 826 Cash 42500 (First interest payment) Interest expense (6% < $722,106) = 43,326 5% * $850,000 = $42,500 5% * $850,000 = $42,500 Present value of an ordinary annuity of $1: n = 40, i = 6% (PVA of $1) Present value of $1: n = 40, i = 6% (PV of $1) 43376 876 42500 31.12.2021 Interest expense Discount on bonds payable Cash (Second interest payment) Interest expense (6% * [$722,106 +826]) = 43,376 5% * $850,000 = $42,500 31.12.2021 Unrealized holding loss 1192 Fair value adjustment 1192 The interest entries increased the book value from $722,106 to $723,808. To increase the book value to $492,000, NFB needed the following adjustment: Fair value adjustment ($725,000 - 723,808) = $1,192