National Company issued 7.5% bonds, dated January 1, with a face amount of $650,000 on January 1, 2019. The bonds mature on December 31, 2027. The market yield for bonds of similar risk and maturity was 5.5%. Interest is paid semiannually on June 30 and December 31. REQUIRED: Determine the price of the bonds at January 1, 2019 (be certain to include all of the “Given” information as discussed in class). Prepare a bond amortization table using the effective interest method (as reviewed in class), and make certain to obtain totals for the columns of Cash Interest Paid, Interest Expense, and Premium Amortization. Prepare the journal entry to record their issuance by National Company on January 1, 2019. Prepare the journal entry recording the first interest payment on June 30, 2019. Prepare the journal entry recording the interest payment on December 31, 2019. Prepare journal entries at maturity on December 31, 2027. Prepare the journal entry to record the retirement of the bond at a call price of $690,000 on January 1, 2024. Instead of retirement of the bond as described in “g” above, assume the bond was retired @108 call price on January 1, 2024. Prepare the journal entry to record this retirement of the bond.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Part 1 -- Bonds:

National Company issued 7.5% bonds, dated January 1, with a face amount of $650,000 on January 1, 2019. The bonds mature on December 31, 2027. The market yield for bonds of similar risk and maturity was 5.5%. Interest is paid semiannually on June 30 and December 31.

REQUIRED:

Determine the price of the bonds at January 1, 2019 (be certain to include all of the “Given” information as discussed in class).
Prepare a bond amortization table using the effective interest method (as reviewed in class), and make certain to obtain totals for the columns of Cash Interest Paid, Interest Expense, and Premium Amortization.
Prepare the journal entry to record their issuance by National Company on January 1, 2019.
Prepare the journal entry recording the first interest payment on June 30, 2019.
Prepare the journal entry recording the interest payment on December 31, 2019.
Prepare journal entries at maturity on December 31, 2027.
Prepare the journal entry to record the retirement of the bond at a call price of $690,000 on January 1, 2024.
Instead of retirement of the bond as described in “g” above, assume the bond was retired @108 call price on January 1, 2024. Prepare the journal entry to record this retirement of the bond.

Part 2 -- Installment note:

On January 1, 2019 National Company signed a $500,000, 6% installment note to be repaid with 9 equal annual installments to be first made on December 31, 2019, and then every December 31 thereafter.

REQUIRED:

Determine the amount of each annual payment.
Prepare an amortization table for this installment note (as reviewed in class).
Prepare the journal entry for the issuance of the installment note.
Prepare the journal entry for the first payment on the note.

Expert Solution

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Answer:

Part 1:

$\begin{array}{rcl} P r i c e o f t h e b o n d & = & C o u p o n \times {P V A F}_{(r, n)} + R e d e m p t i o n \times {P V I F}_{(r, n)} \\ = & $ 24, 375 \times {P V A F}_{(2.75 %, 18)} + $ 650, 000 \times {P V I F}_{(2.75 %, 18)} \\ = & $ 24, 375 \times 14.049 + $ 650, 000 \times 0.6136 \\ = & $ 342, 438 + $ 398, 879 \\ = & $ 741, 317 \end{array}$

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