On January 1, 2018, NFB Visual Aids issued $740,000 of its 20-year, 8% bonds. Th
ID: 2403079 • Letter: O
Question
On January 1, 2018, NFB Visual Aids issued $740,000 of its 20-year, 8% bonds. The bonds were priced to yield 10%. 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 $620,000 as determined by their market value in the over-the-counter market. General (risk-free) interest rates did not change during 2021. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
Required:
1-a. Determine the price of the bonds at January 1, 2018.
1-b to 4. Prepare the necessary Journal entries.
Explanation / Answer
PRICE OF BONDS :
INTEREST
29600*17.1591(w.n)
507909
PRINCIPAL
740000*0.142(w.n)
105080
PRICE OF BONDS (PRESENT VALUE)
612989
W.N
740000*4%
29600
Present value of ordinary annuity of $1;n=40 ;i=5% is 17.1591
Present value of $1; n=40; i=5% is 0.142
JOURNAL ENTRIES
date
Particulars
debit
Credit
Jan 1, 18
cash
612989
Discount on bonds payable
127011
Bonds payable
740000
(being bonds issued)
Jun 30, 18
Interest expense
30650
Discount on bonds payable
1050
cash
29600
(being interest paid)
612989*5% = 30650
Dec 31, 18
Interest expense
30702
Discount on bonds payable
1102
cash
29600
(being interest paid)
(612989+1050)*5% = 30702
Dec 31, 18
Unrealizing holding loss
4859
Fair value adjustments
4858
(being bonds adjusted to the fair value
(620000-612989-1050-1102
PRICE OF BONDS :
INTEREST
29600*17.1591(w.n)
507909
PRINCIPAL
740000*0.142(w.n)
105080
PRICE OF BONDS (PRESENT VALUE)
612989
W.N
740000*4%
29600
Present value of ordinary annuity of $1;n=40 ;i=5% is 17.1591
Present value of $1; n=40; i=5% is 0.142