On January 1, 2016, NFB Visual Aids issued $800,000 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, 2016, the fair value of the bonds was $668,000 as determined by their market value in the over-the-counter market.

1. Determine the price of the bonds at January 1, 2016, and prepare the journal entry to record their issuance.

2. Prepare the journal entry to record interest on June 30, 2016 (the first interest payment).

3. Prepare the journal entry to record interest on December 31, 2016 (the second interest payment).

4. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2016, balance sheet.

Compound Interest Bond

Explanation:

the company has issued compound interest bonds, compound equity bond that means that contains liability and equity. it has obtained the loan and the loan has been categorized at fair value.

we need to find out Equity portion in face value of bond so we solve as follows

We will identify the present value of interest payments and face value of bond at 10% yield

Face Value  = 800000

Coupon Rate = 8%

IRR                = 10% Annual = Semi Annual = 5%

Present Value of bond =

Cash Out flow At 8% = 64000 Annual

No of Outflows = 20

IRR =10

Present Value of the bond 8% interest at 10% with annuity formula:

P=R* (1-(1+I)^-n)/I = P=64000 *(1(1+10%)-20)/10%

                            = P=64000 *(1-0.14)/10% = 64000 * (0.8513/10%)

                            = P = 64000*5.5135 = 544868

Present Value OF Face Value At year O At 10% issued for 20 years :

   P=800000/(1+10%)^20

  P= 118115

present Value of the bond = 118115+544868 =663,783

Equity = Face Value - Present Value of liability

Equity = 800000-663783

Equity = 136,217

1) Price Of the bond = 663783

Journal Entry :

Cash      800000

   Liability 663783

   Equity    136217

To record the liability at present value

2) We need amortization schedule for this requirement

Amortization Schedule for first six months

Year             Face Value   IRR 6%    CR8%  Closing Value

6 months     663783          39827     -            

Journal Entry

Interest Expense          39827

               Liability              39827

To record the interest Expense 30 June 2016

3)

Year             Face Value   IRR 6%    CR8%  Closing Value

6 months     663783          39827         -           703610  

6 months      703610         42217     -64000      681827

Journal Entry

Interest Expense       42217

Liability                       21783

                   Cash                  64000

To record the interest Expense 3 December 2016.

4)

Closing Value of the bond  =        681827

Fair Value At 31-Dec-2016  =         668000

Gain on Fair valuation        =          13827

Journal Entry

Liability         13827

      Gain on Fair Valuation     13827

To record the fair valuation of bond at reporting date

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