National Orthopedics Co. issued 8% bonds, dated January 1, with a face amount of
ID: 2490102 • Letter: N
Question
National Orthopedics Co. issued 8% bonds, dated January 1, with a face amount of $550,000 on January 1, 2013. The bonds mature on December 31, 2016 (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 S1. FVA of S1. PVA of $1, FVAD of $1 and PVAD of S1) (Use appropriate factor(s) from the tables provided.) Required Determine the price of the bonds at January 1, 2013. Principa Price of bonds Prepare the journal entry to record their issuance by National on January 1, 2013. (If no entry is required for a transaction, select "No journal entry required" in the first account field.) Journal Entry Worksheet Record the issuance of the bonds on January 1, 2013 Debit Credit anary 01, 2013 "Enter debts before edtsExplanation / Answer
1)
Because the market yield of 10% exceeds the stated rate of 8%, the bonds
will sell at a discount, i.e, for less than $550000
Cash interest = 8% x $550000 x 6/12 = $22000
PV of interest: Table 4, 8 payments @ 5% = $22000 x 6.46321
=$142190.62
PV of Face = Table 2, 8 periods @ 5% = $550000 x 0.67684 =
$372262
Value of Bond = $142191 + $372262 = $514453
2)
Cash 514453
Discount on B/P 35547
Bonds Payable 550000
3)
Date
Cash Interest
Effective interest balance
discount amortization
Outstanding balance
4% of 550000
5% of balance
1/1/2013
514,453
30-Jun
22000
25,723
3,723
518,176
31-Dec
22000
25,909
3,909
522,084
30-Jun-14
22000
26,104
4,104
526,189
31-Dec
22000
26,309
4,309
530,498
30-Jun-15
22000
26,525
4,525
535,023
31-Dec
22000
26,751
4,751
539,774
30-Jun-16
22000
26,989
4,989
544,763
31-Dec
22000
27,238
5,238
550,000
4)
Interest Expense 25723
Discount on B/P 3723
Cash 22000
Date
Cash Interest
Effective interest balance
discount amortization
Outstanding balance
4% of 550000
5% of balance
1/1/2013
514,453
30-Jun
22000
25,723
3,723
518,176
31-Dec
22000
25,909
3,909
522,084
30-Jun-14
22000
26,104
4,104
526,189
31-Dec
22000
26,309
4,309
530,498
30-Jun-15
22000
26,525
4,525
535,023
31-Dec
22000
26,751
4,751
539,774
30-Jun-16
22000
26,989
4,989
544,763
31-Dec
22000
27,238
5,238
550,000
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