Question

On January 1, 2018, NFB Visual Aids issued $800,000 of its 20-year, 6% bonds. The bonds were priced to yield 8%. Interest is payable semiannually on June 30 and December 31. NFB Visual Aids records interest expense at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2018, the fair value of the bonds was $650,000 as determined by their market value in the over-the-counter market. General (risk-free) interest rates did not change during 2021.

Answer 1

Answer:

The bond were issued at 641,657.81

issuance entry:

cash                    641,657.81 debit

discount on BP   158,341.19 debit

       bonds payable      850,000 credit

first interest payment entry:

interest expense 25,666.31 debit

          cash                             24,000 credit

         discount on PB               1,666.31 credit

Explanation:

The bond will be issued at the present value of coupon payment and maturity discounted at market rate:

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

C 24.000 (800,000 x 6%/2)

time 40 (20 years x 2)

rate 0.04 (market rate 8% / 2)

$24,000 \times \frac{1-(1+0.04)^{-40} }{0.04} = PV$

PV $475,026.5732

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

Maturity 800,000.00

time       40.00

rate         0.04

$\frac{800000}{(1 + 0.04)^{40} } = PV$  

PV   166,631.24

PV c $475,026.5732

PV m  $166,631.2357

Total $641,657.8089

Then, it willalcualte interest expense and amortization as follows:

interest expense

641,657.81 x 0.04 =  25,666.31

cash outlay              (24,000)

amortization               1,666.31

(this will decrease the value of the discount on BP accounts.)