National Orthopedics Co. issued 7% bonds, dated January 1, with a face amount of

Question

National Orthopedics Co. issued 7% bonds, dated January 1, with a face amount of $800,000 on January 1, 2018. The bonds mature on December 31, 2021 (4 years). For bonds of similar risk and maturity the market yield was 8%. 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.

Explanation / Answer

principal 800,000 interest paid on bonds 800,000*3.5%= 28000 For Principal use PV of $1 table at 4% for 8 years for interest use PV of ordinary annuity table at 4% for 8 years 1) Calculation of bonds issue price table values are based on n= 8 i= 4.00% Cash flow Amount PV principal 800,000 584552 (800,000*.73069) interest expense 28000 188517 (28000*6.73274) price of bonds 773069 (please use factor table as given in your question ) 2) Date Accoounting titles & Explanations Debit Credit 1/1/2018 Cash 773069 Discount on bonds payable 26,931 Bonds payable 800,000 3) interest cash bond discount carring period interest interest amortizatioon value end expense 4.00% 1/1/2018 773069 06/30/18 28000 30923 2923 775991 12/31/18 28000 31040 3040 779031 06/30/19 28000 31161 3161 782192 12/31/19 28000 31288 3288 785480 06/30/20 28000 31419 3419 788899 12/31/20 28000 31556 3556 792455 06/30/21 28000 31698 3698 796153 12/31/21 28000 31846 3846 800000 total 224000 250931 26931 4) Date Accoounting titles & Explanations Debit Credit 30/6/2018 interest expense 30923 Discount on bonds 2923 cash 28000 Date Accoounting titles & Explanations Debit Credit 12/31/21 interest expense 31846 Discount on bonds 3846 cash 28000 31-Dec bonds payable 800,000 cash 800,000

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