Park Corporation is planning to issue bonds with a face value of $2,300,000 and

Question

Park Corporation is planning to issue bonds with a face value of $2,300,000 and a coupon rate of 10 percent. The bonds mature in 10 years and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. Park uses the effective-interest amortization method and also uses a premium account. Assume an annual market rate of interest of 8.5 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.) Required: 1. Prepare the journal entry to record the issuance of the bonds. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list View journal entry worksheet Credit No 1 Date General Journal January 01 Cash Premium on bonds payable Bonds payable Debit 2,299,989 12 2,300,000

Explanation / Answer

Solution:

Face Value of Bond = $2,300,000

Coupon Rate = 10%, 5% semi annual

Maturity Period = 10 Years, 20 Half Years

Market rate of Interest = 8.5%, 4.25% semi annual

Issue Price Of Bond = Present value of Interest + Present value of Maturity value at market rate of Interest

= ($115,000 * Cumulative PV Factor at 4.25% for 20 periods) + ($2,300,000 * PV factor at 4.25% at 20th period)

= $115,000 * 13.294365 + $2,300,000 * 0.434989

= 2,529,327.81

Journal Entries - Park Corporation Date Particulars Debit Credit 1-Jan Cash A/c Dr $2,529,327.81            To Bonds Payable $2,300,000.00            To Premium on Bonds Payable $229,327.81 (Being Bonds Issued)

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