Park Corporation is planning to issue bonds with a face value of $770,000 and a
ID: 2562267 • Letter: P
Question
Park Corporation is planning to issue bonds with a face value of $770,000 and a coupon rate of 7.5 percent. The bonds mature in 8 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. (FV of $1, PV of $1, FVA of $1, and PVA of $1)
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?
Long Term Liabilities Debit Credit ? ? ? ? ?Explanation / Answer
1.
Issue price of bond = Present value of coupon payments + Present value of face value of bond
Semi-annually coupon amount = $770,000 *7.5% *1/2 = 28,875
Number of Semi-annually coupon payments = 8 year *2 = 16
Semi-annually market interest rate =8.5%/2 = 4.25% = 0.0425
Present value of annuity = Annuity*{1-(1+r)-n}/r
Present value of Semi-annually coupon payments = $28,875*(1-1.0425-16)/0.0425 = $330,338.94
Present value of face value of bond = $770,000/1.042516 =$395,615.67
Issue price of bond = $330,338.94 + $395,615.67 = $725,954.81
Date
Account titles and explanation
Debit
Credit
January 1
Cash
$ 725,954.81
Discount on issue of bonds
$440,45.19
Bonds payable
$770,000
(To record issue of bonds at discount)
2.
Interest expense = Carrying amount of bond * Market interest rate
Carrying amount of bond = Issue price + Discount amortized till date of interest payment
Date
Account titles and explanation
Debit
Credit
January 1
Interest expense ($725,954.81*8.5%*1/2)
$30,853.08
Discount on issue of bonds
$1,978.08
Cash ($770,000*7.5%*1/2)
$28,875
(To record payment of interest)
3.
Bond payable as on June 30 = $725,954.81 + $1,978.08 = $727,932.89
Date
Account titles and explanation
Debit
Credit
January 1
Cash
$ 725,954.81
Discount on issue of bonds
$440,45.19
Bonds payable
$770,000
(To record issue of bonds at discount)