Question

CHAPTER 14 (6.)

National Orthopedics Co. issued 9% bonds, dated January 1, with a face amount of $750,000 on January 1, 2018. The bonds mature on December 31, 2021 (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, 2018.
2. Prepare the journal entry to record their 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

Solution 1:

Chart Values are based on:
n= (4 Years*2)	8	Half years
i= (10%/2)	5%	Semi annual
Cash Flow	Table Value	*	Amount	=	Present Value
Principal	0.676839	*	$7,50,000	=	$5,07,630
Interest (Annuity) [$750,000*9%*6/12]	6.463213	*	$33,750	=	$2,18,133
Price of Bonds					$7,25,763

Solution 2:

National Orthopedics
Journal Entries
Date	Particulars	Debit	Credit
01-Jan-18	Cash A/c Dr	$7,25,763
	Discount on Bond Payable	$24,237
	To bonds payable		$7,50,000
	(Being bond issued at Discount)

Solution 3:

Bond Amortization Schedule
Date	Cash interest	Interest Expense	Discount amortization	Carrying value
01-Jan-18				$7,25,763
30-Jun-18	$33,750	$36,288	$2,538	$7,28,301
31-Dec-18	$33,750	$36,415	$2,665	$7,30,966
30-Jun-19	$33,750	$36,548	$2,798	$7,33,764
31-Dec-19	$33,750	$36,688	$2,938	$7,36,703
30-Jun-20	$33,750	$36,835	$3,085	$7,39,788
31-Dec-20	$33,750	$36,989	$3,239	$7,43,027
30-Jun-21	$33,750	$37,151	$3,401	$7,46,429
31-Dec-21	$33,750	$37,321	$3,571	$7,50,000

Solution 4:

Journal Entries
Date	Particulars	Debit	Credit
30-Jun-18	Interest Expense Dr	$36,288
	To Discount on bond payable		$2,538
	To Cash		$33,750
	(To record Interest on June 30, 2018)

Solution 5:

Journal Entries
Date	Particulars	Debit	Credit
31-Dec-21	Interest Expense Dr	$37,321
	To Discount on bond payable		$3,571
	To Cash		$33,750