Question

Park Corporation is planning to issue bonds with a face value of $650,000 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) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.)   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?

Answer 1

Ans:

1.

Issue price of bond = Present value of coupon payments + Present value of face value of bond

Semi-annual coupon amount = $650,000*7.5%*1/2 = $24,375

Number of semi-annual coupon payments = 8 years *2 = 16

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 = $24,375*(1-1.0425^-16)/0.0425 = $278,857.54

Present value of face value of bond = $650,000/1.0425⁸ = $650,000*.513786=$333960.90

Issue price of bond = $278,857.54 + $333960.90 = $612818.44

Date	Account titles and explanation	Debit	Credit
January 1	Cash	$612818.44
	Discount on issue of bonds	$ 37181.56
	Bonds payable		$ 650,000.00
	(To record issue of bonds at discount)

2.

Date	Account titles and explanation	Debit	Credit
June 30	Interest expense ($612,818.44*4.25%)	$ 26044.78
	Discount on issue of bonds		$ 1669.78
	Cash ($650,000*7.50%*1/2)		$ 24,375
	(To record issue of bonds at discount)

3.

Bond payable to be reported in balance sheet = Issue price + Discount amortized till June 30 = $612818.44+ $ 1669.78= $614,488.22