Question

National Orthopedics Co. issued 9% bonds, dated January 1, with a face amount of $500,000 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.

Required:
1. Determine the price of the bonds at January 1, 2016.
2. Prepare the journal entry to record their issuance by National on January 1, 2016.
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, 2016.
5. Prepare the appropriate journal entries at maturity on December 31, 2019.

Answer 1

Answer:

The price of the bond is $483,841.97  

The journal record is:

Dr Cash                                          $483,841.97  

Dr Discount on bonds payable     $16,158.03  

Cr Bonds payable                                               $500,000

Find attached amortization schedule.

Dr interest expense      $24,192.10  

Cr cash                                             $22,500  

Cr discount on bonds payable       $1,692.10  

journal on maturity

Dr Bond payable                 $500,000

Cr cash                                                   $500,000

Explanation:

The price of the bond can determined using the pv formula in excel,which is =pv(rate,nper,pmt,fv)

rate is the yield to maturity of 10%/2=5%

nper is the number of interest payments which is 4*2=8 years

pmt is the semi-annual interest on the bond=$500,000*9%/2=$22,500

fv is the face value of $500,000

=pv(5%,8,22500,500000)

pv=$483,841.97  

Discount on bonds payable=$500,000-$483,841.97  =$16,158.03