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National Orthopedics Co. issued 9% bonds, dated January 1, with a face amount of $900,000 on...

Question:

National Orthopedics Co. issued 9% bonds, dated January 1, with a face amount of $900,000 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. (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 standard factor tables.)

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 the journal entry to record interest on June 30, 2018.

4. Prepare the appropriate journal entries at maturity on December 31, 2021.

Table Values Based On:
n=
i=
Cash Flow Amount Present Value
Interest
Principal
Price of Bonds

Bonds Payable:

Bonds are long-term debt instruments issued for the purpose of obtaining capital. Bonds are characterized by their principal (maturity) values and their interest rates. The principal value must be repaid upon maturity, and the interest rate determines the interest amount to be paid on the principal. A bond's issuance price depends on its attractiveness compared to other investment instruments on the market.

Answer and Explanation:

1. Determine the price of the bonds at January 1, 2018.

First, take a look at the present value of $1 and present value of an annuity tables which we'll use to select our factors.

Present Value of 1 Present Value of an Annuity of 1
Periods 1% 2% 3% 4% 5% Periods 1% 2% 3% 4% 5%
1 0.9901 0.9804 0.9709 0.9615 0.9524 1 0.9901 0.9804 0.9709 0.9615 0.9524
2 0.9803 0.9612 0.9426 0.9246 0.9070 2 1.9704 1.9416 1.9135 1.8861 1.8594
3 0.9706 0.9423 0.9151 0.8890 0.8638 3 2.941 2.8839 2.8286 2.7751 2.7232
4 0.9610 0.9238 0.8885 0.8548 0.8227 4 3.902 3.8077 3.7171 3.6299 3.546
5 0.9515 0.9057 0.8626 0.8219 0.7835 5 4.8534 4.7135 4.5797 4.4518 4.3295
6 0.9420 0.8880 0.8375 0.7903 0.7462 6 5.7955 5.6014 5.4172 5.2421 5.0757
7 0.9327 0.8706 0.8131 0.7599 0.7107 7 6.7282 6.472 6.2303 6.0021 5.7864
8 0.9235 0.8535 0.7894 0.7307 0.6768 8 7.6517 7.3255 7.0197 6.7327 6.4632

Table Values Based On:
n= 8
i= 5%
Cash Flow Amount Present Value Factor Present Value
Interest $40,500 x 6.4632 = $261,759.60
Principal $900,000 x 0.6768 = $609,120
Price of Bonds = $870,879.60

2. Prepare the journal entry to record their issuance by National on January 1, 2018.

Account Debit Credit Explanation
Cash $870,879.60 Record inflow of cash from issuance
Discount on Bonds Payable $29,120.40 Record discount on bond ($900,000 - $870,879.60)
Bonds Payable $900,000 Record bonds at face value

3. Prepare the journal entry to record interest on June 30, 2018.

Assuming that the discount is amortized using the straight-line method, we'll journalize.

Account Debit Credit Explanation
Interest Expense $44,140.05 Record interest expense on bonds ($3,640.05 + $40,500)
Discount on Bonds Payable $3,640.05 Record amortization of discount ($29,120.40 / 8)
Cash $40,500 Record outflow of cash in payment of interest ($900,000 x 4.5%)

4. Prepare the appropriate journal entries at maturity on December 31, 2021.

Account Debit Credit Explanation
Interest Expense $44,140.05 Record interest expense on bonds ($3,640.05 + $40,500)
Discount on Bonds Payable $3,640.05 Record amortization of discount ($29,120.40 / 8); Note that discount is now equal to zero.
Cash $40,500 Record outflow of cash in payment of interest ($900,000 x 4.5%)
Bonds Payable $900,000 Remove bonds payable from books
Cash $900,000 Record outflow of cash made to pay for bond principal

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