Park Corporation is planning to issue bonds with a face value of $3,700,000 and
ID: 2527549 • Letter: P
Question
Park Corporation is planning to issue bonds with a face value of $3,700,000 and a coupon rate of 7 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 6.0 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.)
Journal entry worksheet Record the issuances of the bonds. Note: Enter debits before credits. Date General Journal Debit Credit January 01 Record entry Clear entry View general journalExplanation / Answer
CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY Step 1 : Calculation of Annual Coupon Payments Par value of the bond issued is = $37,00,000 Million Annual Coupon % 7.00% Annual Coupon Amount $2,59,000.00 Million Semi Annual Coupon Amount $1,29,500.00 Million Step 2: Calculate number of years to Maturity Number of years to maturity = 10 years Interest is paid semi annyally so total period = 10 Years * 2 = 20 Periods Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds Market rate of interest or Yield to Maturity or Required Return = 6% Bonds interest is paid semi annualy means so discounting factor = 6 % /2= 3 % PVF = 1 / Discount rate = 1/ 1.03 Result of above will again divide by 1.03 , repeat this lat period Period Interest Amount (In Million) PVF @ 3% PresentValue 1 Interest $1,29,500.00 0.9709 $1,25,728.16 2 Interest $1,29,500.00 0.9426 $1,22,066.17 3 Interest $1,29,500.00 0.9151 $1,18,510.84 4 Interest $1,29,500.00 0.8885 $1,15,059.07 5 Interest $1,29,500.00 0.8626 $1,11,707.84 6 Interest $1,29,500.00 0.8375 $1,08,454.21 7 Interest $1,29,500.00 0.8131 $1,05,295.35 8 Interest $1,29,500.00 0.7894 $1,02,228.50 9 Interest $1,29,500.00 0.7664 $99,250.97 10 Interest $1,29,500.00 0.7441 $96,360.16 11 Interest $1,29,500.00 0.7224 $93,553.56 12 Interest $1,29,500.00 0.7014 $90,828.69 13 Interest $1,29,500.00 0.6810 $88,183.20 14 Interest $1,29,500.00 0.6611 $85,614.76 15 Interest $1,29,500.00 0.6419 $83,121.12 16 Interest $1,29,500.00 0.6232 $80,700.12 17 Interest $1,29,500.00 0.6050 $78,349.63 18 Interest $1,29,500.00 0.5874 $76,067.60 19 Interest $1,29,500.00 0.5703 $73,852.04 20 Interest $1,29,500.00 0.5537 $71,701.01 21 Bond Principal Value $37,00,000.00 0.5537 $20,48,600.29 Total $39,75,233.28 Current Bonds Price = $39,75,233.28 Issue price of the bond= $39,75,233.28 Par Value of the bonds = $37,00,000.00 Discount to be amortized = $2,75,233.28 ANSWER =1) Journal Entries Date Account Title and explanation Debit Credit January, 01 Cash $ 39,75,233 To 10% Bonds $ 37,00,000 To premium on bonds payable $ 2,75,233 ANSWER =3) BALANCE SHEET (PARTIAL ) (As on June 30th ) Long Term Liabilities: Bonds Payable $ 37,00,000.0 Balance in bonds Premium $ 2,64,990 Net Balance - Bonds Payable $ 39,64,990 Working Notes: for calculation of the interest expenses Interest Expenses of June on par = $1,29,500.00 Add: Amortization interest = $10,243.00 Total interest = $1,19,257.00 Journal Entries Date Account Title and explanation Debit Credit January, 01 Interest Expenses $ 1,19,257 Amortization of Premium $ 10,243 To Cash $ 1,29,500 (To Record the interest payment of june 30) Working notes EFFECTIVE - INTEREST AMORTIZATION SCHEDULE MARKET RATE OF INTEREST IS 6% AND BOND INTEREST IS 7% Date Interest payment on face value Interest Expenses (Cash paid - Decrease in Carrying value) Amortization expenses Debit Balance in bond discount Credit Balance in acct payable book Value of the bond 1/1/18 $0.00 $0.00 $0.00 $2,75,233.28 $37,00,000.00 $39,75,233.28 1 06/30/18 $1,29,500.00 $1,19,257.00 -$10,243.00 $2,64,990.28 $37,00,000.00 $39,64,990.28 2 12/31/18 $1,29,500.00 $1,18,949.71 -$10,550.29 $2,54,439.99 $37,00,000.00 $39,54,439.99