Park Corporation is planning to issue bonds with a face value of $630,000 and a
ID: 2562103 • Letter: P
Question
Park Corporation is planning to issue bonds with a face value of $630,000 and a coupon rate of 7.5 percent. The bonds mature in 4 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 discount account. Assume an annual market rate of interest of 8.5 percent.
1. Prepare the journal entry to record the issuance of the bonds
2. Prepare the journal entry to record the interest payment on June 30 of this year.
3. What bond payable amount will Park report on its June 30 balance sheet?
Explanation / Answer
1.
Issue price of bond = Present value of coupon payments + Present value of face value of bond
Semi-annual coupon amount = $630,000*7.5%*1/2 = $23,625
Number of semi-annual coupon payments = 4 years *2 = 8
Semi-annual market interest rate = 8.5%/2 = 4.25% = 0.0425
Present value of annuity = Annuity amount*{1-(1+r)-n}/r
Present value of coupon payments = $23,625*(1-1.0425-8)/0.0425 = $157,431.85
Present value of face value of bond = $630,000/1.04258 = $451,577.24
Issue price of bond = $157,431.85 + $451,577.24 = $609,009..09
Date
Account titles and explanation
Debit
Credit
January 1
Cash
$ 609,009.09
Discount on issue of bonds
$ 20,990.91
Bonds payable
$ 630,000.00
(To record issue of bonds at discount)
2.
Date
Account titles and explanation
Debit
Credit
June 30
Interest expense ($609,009.09*4.25%)
$ 25,882.89
Discount on issue of bonds
$ 2,257.89
Cash ($630,000*7.50%*1/2)
$ 23,625.00
(To record issue of bonds at discount)
3.
Bond payable to be reported in balance sheet = Issue price + Discount amortized till June 30 = $609,009.09 + $2,257.89 = $611,266.98
Date
Account titles and explanation
Debit
Credit
January 1
Cash
$ 609,009.09
Discount on issue of bonds
$ 20,990.91
Bonds payable
$ 630,000.00
(To record issue of bonds at discount)