National Orthopedics Co issued 11 bonds dated January 1 with

National Orthopedics Co. issued 11% bonds, dated January 1, with a face amount of $700,000 on January 1, 2018. The bonds mature on December 31, 2021 (4 years). For bonds of similar risk and maturity the market yield was 12%. 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.

Schedule table:

Prepare an amortization schedule that determines interest at the effective rate each period. (Round final answers to the nearest whole dollar.)

Solution

1) Bond Price Formula:

Bond Value = C/2 {[1-(1+(YTM/2))^-2t/(YTM/2)] + [F / (1+ (YTM/2))^2t]

B₀ = ? (Bond Price)
C = Coupon payment received = 11% * $700,000 = $77,000
F = Face value = $700,000
YTM = yield to maturity = 12% or 0.12
t = number of periods = 4 years * 2 = 8

Price of Bond = $77,000/2*{[1-(1+(0.12/2))^-8/(0.12/2)] + [$700,000 / (1+ (0.12/2))⁸]
=> ($38,500 * 6.209793811) + ($700,000 / 1.593848075)
= $678,265.72

2)

Date

Particular

Debit

Credit

01-Jan-18

Cash

$678,265.72

Discount on Bonds Payable

$21,734.28

Bonds Payable

$700,000.00

3)

Semiannual Interest Period-End

Cash Interest

Bond Interest Expense

Discount Amortization

Carrying Value

01/01/2018

                       -  

                                           -  

                                          -  

        700,000.00

06/30/2018

       38,500.00

                           40,695.94

-2,195.94

        678,265.72

12/31/2018

       38,500.00

                           40,827.70

-2,327.70

        680,461.66

06/30/2019

       38,500.00

                           40,967.36

-2,467.36

        682,789.36

12/31/2019

       38,500.00

                           41,115.40

-2,615.40

        685,256.73

06/30/2020

       38,500.00

                           41,272.33

-2,772.33

        687,872.13

12/31/2020

       38,500.00

                           41,438.67

-2,938.67

        690,644.46

06/30/2021

       38,500.00

                           41,614.99

-3,114.99

        693,583.13

12/31/2021

      38,500.00

                           41,801.89

-3,301.89

        696,698.11

4)

Date

Particular

Debit

Credit

30-Jun-18

Bond interest expense

40,695.94

Discount on Bonds Payable

2,195.94

Cash

       38,500.00

5)

Date

Particular

Debit

Credit

31-Dec-21

Bond interest expense

41,801.89

Discount on Bonds Payable

3,301.89

Cash

       38,500.00

To record interest expense for the semi-annual period ending on 31 Dec 2021

31-Dec-21

Bonds Payable

   700,000.00

Cash

     700,000.00

To record payment of bond at maturity

Date	Particular	Debit	Credit
01-Jan-18	Cash	$678,265.72
Discount on Bonds Payable	$21,734.28
Bonds Payable		$700,000.00