Question

National Orthopedics Co. issued 9% bonds, dated January 1, with a face amount of $500,000 on January 1, 2021. The bonds mature on December 31, 2024 (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:
a. Determine the price of the bonds at January 1, 2021.
b. Prepare the journal entry to record their issuance by National on January 1, 2021.
c. Prepare an amortization schedule that determines interest at the effective rate each period.
d. Prepare the journal entry to record interest on June 30, 2021.
e. Prepare the appropriate journal entries at maturity on December 31, 2024.

Answer 1

Answer:

a)

Total $483,841.9681

b)

cash                   483,842  debit

discount on BP      16,158  debit

        Bonds Payable 500,000  credit

c)

attached the schedule

d)

interest expense 24,192.1 debit

discount on BP              1,692.1 credit

cash                     22,500   credit

e)

interest expense 24276.7 debit

discount on BP                1776.7 credit

cash                       22500 credit

Explanation:

The price of the bonds is the present valeu of the maturity and coupon payment at the market rate:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

Coupon payment:

22,500.000 (500,000 x 9% /2 )

time 8 (4 years x 2 payment per year)

rate 0.05 (10% / 2)

$22500 \times \frac{1-(1+0.05)^{-8} }{0.05} = PV$

PV $145,422.2871

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity   500,000.00

time   8.00

rate  0.05

$\frac{500000}{(1 + 0.05)^{8} } = PV$  

PV   338,419.68

PV c $145,422.2871

PV m  $338,419.6810

Total $483,841.9681

We compare against face valeu to deteminate wether is premium or discount.

procceds 483,842

face value 500,000

discount on bonds payable -16,158

As lower it is a discount.

For the interst we calcualte doing market rate times carrying value at the time given.

then we subtract the cash outlay and the difference is the amortization in the discounts