Question

On January 1, 2018, NFB Visual Aids issued $920,000 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 $770,000 as determined by their market value in the over-the-counter market.

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

2. Record the journal entry for the issuance of the bonds

3. Record the journal entry for the first interest payment

4. Record the journal entry for the second interest payment

5. Record the journal entry to adjust the bonds to their fair value for the Dec 31, 2018 Balance Sheet

Answer 1

1)use pv formaule to find the price of the bonds
=pv(rate,nper,pmt,fv,type)
=pv(10%/2,(20*2),(920000*8%/2),920000,0)
=762,136.41

2)Cash (db) 762136.41
discount on bonds payable (db) 157863.59
bonds payable (cr) 920000

3)Interest expense (db) (10%/2)*book value of bond=5%*762136.41=38106.82
discount on bonds payable (cr) 1306.82
Cash (cr) =(4%/2)*920000=36,800

4)Interest expense (db) (10%/2)*book value of bond=5%*(762136.41+1306.82)=38172.16
discount on bonds payable (cr) 1372.16
Cash (cr) =(4%/2)*920000=36,800

5)Fair value adjsutment=770000-(762136.41+1306.82+1372.16)=5184.61

unrealized holding loss(db) 5184.61
fair value adjustment(cr) 5184.61