Question

Park Corporation is planning to issue bonds with a face value of $790,000 and a coupon rate of 7.5 percent. The bonds mature in 6 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.)

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.)

2. Prepare the journal entry to record the interest payment on June 30 of this year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

3. What bond payable amount will Park report on its June 30 balance sheet? (Enter all amounts with a positive sign.)

Answer 1

Solution:

Part 1 --- Journal Entry to record issuance of bond

First of all we need to calculate the issue price of the bonds.

Semi Annual Stated Coupon Interest = face Value 790,000 x Coupon Rate 7.5% * 1/2half yearly = $29,625

Semiannual period to maturity (n) = 6 years x 2 = 12

Semi Annual Market Interest Rate (R) = 8.5%*1/2 = 4.25%

Present Value of Bonds (Price of the bonds issued) = Semi Annual Coupon Interest x PVIFA (R, n) + Face Value x PVIF (R, n)

= (29,625*9.25039) + (790,000*0.60686)

= 274,042.80 + 479,419.40

= $753,462

Note –Answer may be different slightly due to decimal places of PV factor. In this case please provide pv factor table to get the very correct answer.

Note -- Calculation of Present Value Factor (Rounded to 5 decimal places)

PVIFA (R, n) = Present Value interest factor for ordinary annuity at R% for n periods = (1 – 1/(1+R)ⁿ) / R

PVIFA (4.25%, 12) = (1 – 1/(1+0.0425)¹²) / 0.0425 = 9.25039

PVIF (R, n) = Present Value interest factor for ‘n’ period at ‘R’% = 1/(1+R)ⁿ

PVIF (4.25%, 12) = 1/(1+0.0425)¹²= 0.60686

Journal Entry

Date	General Journal	Debit	Credit
Jan.1	Cash	$753,462
	Discount on Bonds Payable (Bal. fig)	$36,538
	Bonds Payable		$790,000

Part 2 – Journal Entry to record Interest payment on June 30

We need to prepare the Bond Discount amortization table for this part.

Schedule of Amortization of Bond DISCOUNT (Effective Rate Method)
Payment intervals	Date	Interest Expense (Carrying Value at the beginning of period x Market Interest Rate 8.5% * 1/2half yearly)	Cash Paid (Face Value of the Bonds $790,000 x Coupon Rate 7.5% * 1/2 half yearly)	Discount Amortization (Interest Expense - Cash Paid)	Unamortized Bond Discount	Par Value of Bonds Payable	Book Value (Par Value - Balance of Unamortized Bond Discount)
0	Jan.1				$36,538	$790,000	$753,462
1	June.30	$32,022	$29,625	$2,397	$34,141	$790,000	$755,859

Journal Entry

Date	General Journal	Debit	Credit
June.30	Interest Expense	$32,022
	Discount on Bonds Payable (Amortization) (Bal. fig)	$2,397
	Interest Payable or Cash		$29,625

Part 3 –

Reporting on balance sheet June 30

Balance Sheet at June 30 (Partial)
	$$	$$
Long Term Borrowings:
Bonds Payable (Face Value)	$790,000
Less: Discount on Bonds Payable (Unamortized Portion)	$34,141
Carrying Value of Bonds Payable		$755,859