In: Accounting
Park Corporation is planning to issue bonds with a face value of $700,000 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.
3. What bond payable amount will Park report on its June 30 balance sheet?
Solution 1:
Computation of bond price | |||
Table values are based on: | |||
n= | 12 | ||
i= | 4.25% | ||
Cash flow | Table Value | Amount | Present Value |
Par (Maturity) Value | 0.606858 | $700,000.00 | $424,801 |
Interest (Annuity) | 9.250395 | $26,250.00 | $242,823 |
Price of bonds | $667,624 |
Journal Entries - Park Corporation | |||
Date | Particulars | Debit | Credit |
1-Jan | Cash Dr | $667,624.00 | |
Discount on issue of bond Dr | $32,376.00 | ||
To Bond Payable | $700,000.00 | ||
(To record issue of bond at discount) |
Solution 2:
Journal Entries - Park Corporation | |||
Date | Particulars | Debit | Credit |
30-Jun | Interest expense Dr ($667,624*8.5%*6/12) | $28,374.00 | |
To Cash | $26,250.00 | ||
To Discount on issue of bond | $2,124.00 | ||
(To record interest expense and discount amortization) |
Solution 3:
Park Corporation | ||
Balance Sheet (Partial) | ||
As of June 30 | ||
Particulars | Amount | |
Long term liabilities: | ||
Bond Payable | $700,000.00 | |
Less: Discount on issue of bond | $30,252.00 | |
Net Bond Payable | $669,748.00 |