Park Corporation is planning to issue bonds with a face value of $2,300,000 and
ID: 2518019 • Letter: P
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.)Explanation / Answer
Solution 2:
Face value of bond = $2,300,000
Coupon rate = 10%, 5% semi annual
Maturity period = 10 years, 20 semi annual period
Market rate of interest = 8.50%, 4.25% semi annual
Issue price of bond = Present value of principal and interest discounted at market rate of interest
= ($2,300,000 * 5%) * Cumulative PV Factor at 4.25% for 20 periods + $2,300,000 * PV factor at 4.25% for 20th period
= $115,000 * 13.29437 + $2,300,000 * 0.434989 = $2,529,328
Solution 3:
Journal Entries - Park Corporation Date Particulars Debit Credit 30-Jun Interest Expense Dr ($2,529,328*4.25%) $107,496.00 Premium on bond Dr $7,504.00 To Cash $115,000.00 (Being interest paid and premium amortized)