Question

Park Corporation is planning to issue bonds with a face value of $3,500,000 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.

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. How will Park present its bonds on its June 30 balance sheet?

Answer 1

Solution 1:

Chart Values are based on:
n= (10 Years*2)	20	Half years
i= (8.5%/2)	4.25%	Semi annual
Cash Flow	Table Value	*	Amount	=	Present Value
Par (Maturity) Value	0.43499	*	$35,00,000	=	$15,22,463
Interest (Annuity) [$3,500,000*10%*6/12]	13.29437	*	$1,75,000	=	$23,26,514
Price of Bonds					$38,48,977

Park Corporation
Journal Entries
Date	Particulars	Debit	Credit
01-Jan	Cash A/c Dr	$38,48,977
	To bonds payable		$35,00,000
	To Premium on bonds Payable		$3,48,977
	(Being bond issued at premium)

Solution 2:

Date	Particulars	Debit	Credit
30-Jun	Interest Expense Dr ($3,848,977*8.5%*6/12)	$1,63,582
	Premium on bond Payable Dr	$11,418
	To Cash ($3,500,000*10%*6/12)		$1,75,000
	(To record first Interest Payment and Amortization of Premium on issue)

Solution 3:

Park Corporation
Balance Sheet (Partial)
At June 30
Long Term Liabilities:
Bond Payable	$35,00,000
Add: Unamortized Premium ($348977-$11418)	$3,37,559
		$38,37,559