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

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

PV of face value = $900,000 / (1 + 5%)⁸ = $612,525

PV of coupon payments = $40,500 x 6.4632 (PV annuity factor, 5%, 8 periods) = $261,760

market price of bonds = $874,285

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

January 1, 2018, bonds issued at a discount

Dr Cash 874,285

Dr Discount on bonds payable 25,715

    Cr Bonds payable 900,000

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

Dr Interest expense 43,714

    Cr Cash 40,500

    Cr Discount on bonds payable 3,214

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

Dr Bonds payable 900,000

Dr Interest expense 43,714

    Cr Cash 940,500

    Cr Discount on bonds payable 3,214

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